With ever-increasing property prices, first-time buyers need a down payment of between around $15,000 and $50,000 depending on where in the state they are. Add to that the high cost of living – not to mention rent – and it’s clear that many young people will struggle to raise that kind of money.
Advance then, as far as possible, the “bank of mom and dad” to help the offspring to make their way in the world.
According to Francis McTaggart, founder of Fortitude Financial Planning in Drogheda, two of the most common requests he receives are how to help children access property and how to pay for the wedding of one or more children.
Nick Charalambous, managing director of Cork-based Alpha Wealth, agrees. “It’s probably the most common topic I have with clients,” he says of helping kids get on the property ladder.
For some people, helping a child with a down payment or financing a wedding will simply be a matter of writing a check; for the rest of us, however, it will take careful planning and saving.
The good news is that by starting young and saving a little, and often reaching a stated goal can involve less pain than expected.
Building a substantial nest egg is possible, even with limited savings. Yes, saving €40,000 for a deposit for a house in Dublin (and potentially much more, given the impact of inflation) will not be realistic for many. But even a small amount each month can provide a five-figure sum.
If you start when the child is young, you will have a longer savings horizon. And, given the average age of the first home buyer of around 38, according to the most recent data – as well as an average age at marriage of 37.8 for the married and 35.7 for the married – according to figures from the Central Bureau of Statistics, you may be able to continue saving long after the child has reached adulthood.
It should be clear, of course, that saving for a child should only come after your own needs have been met first – and there should be no pressure to do so. As McTaggart says, making such a decision to save for a child’s future needs must be considered in relation to a person’s overall financial situation and seeking financial advice could be helpful in this regard.
“I think there’s a bit of pressure for parents who are worried about how hard it will be to climb the property ladder,” Charalambous says, adding, “I haven’t had the level of savings that most parents yearn to save for their own children. I see customers who have credit card bills but save religiously for their children. It doesn’t make financial sense to do that.”
If you start saving for your children and then run into financial difficulty, remember that you can always reduce your savings for a while, or stop altogether, if your financial situation changes.
The best advice is to simply start. It might only cost $25 a month or even a lot more, but at least if you’re starting out, you can add to that over time. Setting up a direct debit frees you from the decision.
“Automate your savings and automate your investments,” McTaggart says, urging people to “pay yourself and your future self first. Don’t wait until the end of the month to pay yourself.
Compounding has traditionally helped long-term savers, but it hasn’t been much help in the low interest rate environment of recent years. With rising interest rates, however, this could change.
With an average deposit rate of 1%, $50 a month could turn into more than $13,000 over 20 years. Triple that to 3% and your money turns into €16,415. As this shows, it really pays to seek out the best possible deposit rate – and be prepared to switch if necessary – when saving for the longer term.
But don’t expect magic anytime soon. Although deposit rates will begin to rise as interest rates rise, this will not happen immediately.
“It will probably take three or four years before we see reasonable interest rates,” says Charalambous.
But a deposit account isn’t your only option. By taking a little risk, you could increase your returns.
As Charalambous notes, people say, “I want to keep up with inflation, but I don’t want to risk my money when it’s for my kids. The reality is that you can’t have it both ways. Zero risk will mean returns below inflation, which will effectively reduce the value of your savings pot.
However, the risk can be mitigated by saving for the long term. He suggests people apply a five-year rule: when saving or investing for five years or more, some level of risk should be taken.
So, for example, if your child is 16 and you are saving for college, a stock fund is not the right option. But saving from birth or from an early age gives a parent plenty of time to ride out the vagaries of the stock market.
“Parents of a newborn should accept the risk, as they are usually over 18 to make sure their money works,” he says.
And you don’t need a lot of money to get started. With Zurich Life, for example, you can start saving from just €75 in one of its regular savings funds.
Such an approach can generate substantial returns. Consider $75 saved each month for 20 years. At the end of the term, based on an annual return of 5%, you will have repaid approximately €30,500. This means that you will have added €12,500 to your child’s nest egg thanks to the performance of the investment.
Or how about €150? It could return around €61,000 after 20 years, based on the same investment performance.
Of course, markets go up and down, but the advantage of this approach is that your child may not need the money when the markets are down and can afford to wait for conditions to improve. to collect the product.
In addition to Zurich Life, regular investment products are offered by Irish Life, New Ireland, Aviva and Standard Life. An advantage of these funds is also that they generally offer easy access; so you can decide to stop payments or withdraw all your money, if you wish.
Pay attention to costs when choosing a regular savings fund: while you can’t control future performance, you can control the amount taken in fees and charges. Charalambous suggests that you get the fee structure in writing from the various providers – many are sold massively through the broker network – and shop around before making your final decision.
You should ask yourself what is the allocation rate – “how much of your money is physically invested each month” – what are the management fees and broker fees. In addition, you will have to take into account the government levy of 1%.
Exchange-traded funds (ETFs) may offer a cheaper option, given annual fees as low as around 0.1%. However, they can be tricky for Irish investors as you have to calculate the tax due yourself – and with regular savings you may have to do this every month, while you will also have to deal with brokerage.
Another option is to buy stocks. This can be potentially very lucrative – shares of Apple, for example, have increased almost sixfold over the past 10 years. But such a concentrated approach can also be risky.
“The stock can drop to zero and you can lose it all,” McTaggart warns.
When saving for a child, you will need to think about the tax considerations of doing so. If you are saving in your own name, when it comes to handing over the funds, they will be treated by Revenue as a ‘gift’ and therefore potentially subject to gift tax (CAT) at a rate of 33%. While a child can inherit €335,000 tax-free from their parents, meaning no tax will likely need to be paid, this will reduce what they can receive tax-free later in life. life or by inheritance.
To avoid this, and especially if you will likely have assets above the tax-exempt threshold to bequeath to your children, you should consider putting your savings for your children directly in their name. This means that you will be able to benefit from the €3,000 annual exemption for small donations, which means that €250 per month (€500 from two parents) can be saved each month tax-free.
To meet tax obligations, these savings generally must be in the child’s name. You probably won’t be able to do this for shares; DeGiro, for example, stopped opening such accounts in 2018 due to “stricter customer due diligence laws and regulations for people under 18,” according to a spokesperson for the brokerage.
But you can open accounts with the State Savings Bank as well as the aforementioned life insurance companies. These accounts are known as trust accounts and may carry early exit penalties. They will be converted to the child’s name at the age of 18.
Unsurprisingly, there are some considerations that come with this. First, if it’s in the child’s name, you won’t have access to it if times get tough. You must therefore be very sure that you can afford to part with the funds.
Second, when the child turns 18, they will have the legal right to access the money. Many parents might shy away from the idea of a child suddenly having access to such a large lump sum.
McTaggart says many parents simply don’t tell their kids about the money they’ve saved for them until it’s needed. However, he thinks there is merit in doing so to help their adult children better understand how their finances work.
“We can take advantage of it at 18 to educate them on the benefits,” he says.
Charalambous agrees: “We need to make sure our children understand money management, rather than just hoarding money for them.