Doing it for the kids

Setting up a savings account for your child can instil in them a lifelong understanding and respect for their finances – as well as preparing for an expensive college education

WITH THE WAY pensions and house prices are going, if you don’t want to work until you’re 90 you might end up relying on your children to assist in your retirement. If this turns out to be the case, then encouraging them to put money away and build up saving habits will be essential. At the same time, with the cost of education continuing to rise and the threat of third-level fees being introduced once more, it may be time to give some thought to just how you will fund those future expenses.

For children, there is a wide variety of savings products available. Of course banks want to capture customers young – give a child a money box and it could lead to a lifetime of loans, mortgages, credit cards and deposits.

However, parents should be wary of giveaways as these can often mask poor returns. After all, while a priority may be to encourage a habit of saving, it’s no harm making a decent return at the same time. So what are the options?

Top of the class are the offerings from both EBS and Permanent TSB. The Safari Saver account from Permanent TSB pays out 3 per cent on amounts up to €20,000. Similarly, EBS pays 3 per cent on amounts of between €1 and €5,000, and offers a range of free incentives, including an annual birthday card, money box and a €20 bonus if €50 is saved and maintained in the account for the first six months.

Ulster Bank’s Urfirst account is aimed at children under 12, and since the reintroduction of the Henry Hippo money box three years ago, it has seen a significant uplift in new accounts, as it plays on parents’ nostalgia for their own childhoods.

You can open a Henry Hippo account for a child for as little as €5, and is one of the better options in terms of returns – it offers an interest rate of 2.31 per cent.

At National Irish Bank, a Junior Saver account can be opened for as little as €1 and pays a rate of between 1.35-2.10 per cent depending on how much you’re willing to deposit.

At the bottom end of the scale are offerings from both AIB and Bank of Ireland (BOI). AIB’s Junior Saver Account, which is aimed at children under 12, pays interest at 1 per cent.

And worst of the bunch is the offering from BOI. It offers a Childsave account for children under seven, which enables you to make either monthly direct debits or a lump sum payment into the account. You can save from just €1 per month but returns are dismal at 0.5 per cent a year.

For those over seven, a Young Savers account can be set up, which comes with an online savings robot. Savings can start from as little as €1, with money withdrawn and deposited from any branch in Ireland. Again, however, the name is a bit of a misnomer as this account earns just 0.5 per cent in interest.

Another option are post office savings stamps, which have the added advantage of allowing children to participate in saving by sticking stamps to their Cyril’s Savings Card. Children can also count up the stamps to see how much money they have saved. However, the downside with such booklets of course is the possibility that you might lose them or even forget that your children ever had them. On top of this, they can be a bit cumbersome because you can’t simply en-cash the booklet, but rather must lodge it in a Post Office Savings bank account. And returns on this account are negligible – just 1 per cent, and interest is liable to DIRT.

Finally, the other option is to check out your local credit union is offering.

If you are interested in opening an account for your child – or indeed godchild or grandchild – some guidelines apply. Firstly, if the child is under seven, the account must be opened in your name, with the child’s name noted, and withdrawals can only be made by you as the guardian of the account. Thereafter, the child may be allowed to withdraw money themselves.

In addition, you will need proof of identity, such as a valid passport or driver’s license, proof of current permanent address, utility bill or correspondence from a financial institution which is not more than six months old, as well as ID for the child.

If your objective is to generate some real returns to fund school fees or the cost of third-level education, you may be better off to consider a longer-term option in your own name.

But watch out for anything that’s branded as such.

For example, BOI’s SmartChoice Education is a regular savings plan linked to the stock market which includes a 25 per cent loyalty bonus based on your first year’s contributions for those who commit to saving at least €100 a month for a period of seven years. If you save €140 a month therefore, you will be due a bonus of €420 after seven years.

However, fees for the funds available are expensive, which can mitigate the benefit of the bonus. For example, contributions of up to €12,000 a year are charged a fee of 5 per cent, while the fee goes down to 3 per cent for any contributions above this level. In addition, an annual management fee of 1.5 per cent is also charged. So, if you invest €1,680 a year (12 x €140), the cost of running the fund will be €109 in the first year. You’d want pretty decent returns to make up for that.

A cheaper option, therefore, would be to consider an index-linked or “passive” fund, rather than a more expensive actively managed one. For example, Quinn Life’s Pride ‘n’ Joy Freeway product attracts the same charges as its mainstream products and allows you to access the full suite of the firm’s funds by making monthly contributions starting at €50. There are no transaction charges on regular premiums and annual management fees start at 1 per cent per annum for funds such as its European and Irish equities, rising to 1.2 per cent for US, biotech and technology funds.

If you do go for an investment fund to save for college, you should consider switching to a stable deposit account some time before you need the funds, to avoid the swings of the stock market. It is generally advised to only invest funds in the stock market that you don’t need access to for at least five years.

Other options for long-term savings include regular savings options. EBS’s Family Savings Account pays 5 per cent on amounts of between €100 and €1,000 each month, while AIB’s Parent Saver Account offers 4 per cent on monthly savings of up to €200.

You could also consider a tax-free option. For example, An Post’s Childcare Plus allows you to earn 20 per cent tax-free over five years. To participate, your child benefit monthly payments (up to €12,000 a year) will automatically be lodged into this account for one year. After this, the total sum will earn 20 per cent if left on deposit for five years, with interest paid on a cumulative basis. So, if you have one child, you could save €2,000. If you wish to keep saving once the 12 months are up, you will have to embark on a new savings cycle.

An Post also has an easy access account where you can save your child benefit payment. However, this only earns interest at 1 per cent.

But whatever product you go for, the key is to just do it. Remember, if you put away your child benefit of €140 each month and get a return on your money of 4 per cent a year, you will have a nest egg of some €44,000 by the time the child is 18, before DIRT at 27 per cent is deducted.