With ever-rising house prices, first-time buyers need a down payment of between about €15,000 and €50,000 depending on where they are in the State. Add on the high cost of living – not to mind rents – and it’s clear that many young people will struggle to get this kind of money together.
Step forward then, where possible, the “bank of mum and dad” to help offspring make their way in the world.
According to Francis McTaggart, founder of Fortitude Financial Planning in Drogheda, two of the most common inquiries he receives are how to help get kids on the property ladder, and how to pay for a wedding for one or more offspring.
Nick Charalambous, managing director at Cork-based Alpha Wealth, agrees. “It’s probably the most common subject I have with clients,” he says of helping get children on the property ladder.
For some people, helping a child with a deposit or funding a wedding will simply be a matter of writing a cheque; for the rest of us, however, it will take some careful planning and saving.
The good news is that by starting young, and saving a little, and often, attaining a stated goal can involve less pain than might be expected.
Building a substantial nest egg is possible, even with limited savings. Yes, saving €40,000 for a deposit for a home in Dublin (and potentially substantially more, given the impact of inflation) won’t be realistic for many. But even a small amount every month can deliver a five-figure sum.
If you start when the child is young, you will have a longer savings horizon. And, given the average first-time buyer age of about 38, according to the most recent data – as well as an average age of getting married of 37.8 years for grooms and 35.7 years for brides – according to Central Statistics Office figures, you may be able to continue to save long into the child’s adulthood.
It should be clear of course that saving for a child should come only after your own needs are met first – and there shouldn’t be any pressure to do so. As McTaggart says, making such a decision to save for a child’s future needs should be considered against a person’s overall financial circumstances and seeking financial advice could be helpful in this regard.
“I do think there is a little bit of pressure for parents who have concerns about how difficult it is to get on the property ladder,” says Charalambous, adding: “I wasn’t afforded the level of savings most parents aspire to put away for their own children. I do see clients who have credit-card bills but are saving religiously for their children. It doesn’t make financial sense to do that.”
If you do start saving for your children and then struggle financially, remember you can always cut back on your savings for a while, or stop altogether, should your financial circumstances change.
The best advice is simply to start. It might be just €25 a month, or substantially more, but at least if you start, you may add to this over time. Setting up a direct debit takes the decision out of your hands.
“Automate your savings and automate your investments,” says McTaggart, urging people to “pay yourself and your future self first. Don’t wait till the end of the month to pay yourself.”
Compounding has traditionally helped savers over the long term, but it hasn’t been a help in the low interest rate environment of the last few years. With interest rates on the rise, however, this could change.
With an average deposit rate of 1 per cent, €50 a month could turn into more than €13,000 over 20 years. Triple that to 3 per cent, and your money turns into €16,415. As this shows, it really pays to seek out the best deposit rate possible – and be prepared to switch where necessary – when saving over the longer term.
But don’t expect any magic any time soon. While deposit rates will start to rise as interest rates go up, it won’t happen immediately.
“It will more likely be three or four years before we see any reasonable rates of interest,” says Charalambous.
Risk
But a deposit account is not your only option. By taking on a bit of risk you could supercharge your returns.
As Charalambous notes, people say: “I want to keep pace with inflation, but I don’t want to risk my money when it’s for my children.” The reality is you can’t have it both ways. Zero risk will mean below-inflation returns, effectively reducing the value of your savings pot.
However, risk can be mitigated when saving over the long term. He suggests people apply a five-year rule: when saving or investing for five years or longer, it’s appropriate to take on some level of risk.
So, for example, if your child is 16 and you’re saving for college, then a fund invested in equities isn’t the right option. But saving from their birth or a young age gives a parent plenty of time to ride the vagaries of the stock market.
“Parent with a newborn child should be accepting of risk, as they typically have 18+ years to ensure their money works,” he says.
Which direction are house prices going?
And you don’t need a hefty amount to get started. With Zurich Life, for example, you can start saving from as little as €75 in one of its regular saving investment funds.
Such an approach can deliver substantial returns. Consider €75 saved every month for 20 years. At the end of the term, based on an annual return of 5 per cent, you’ll have returned about €30,500. This means that you’ll have added €12,500 to your child’s nest egg thanks to investment performance.
Or how about €150? This could deliver about €61,000 after 20 years, based on the same investment performance.
Of course, markets rise and fall but the advantage of this approach is that your child may not need the money when markets are down, and can afford to wait until conditions improve to cash in the proceeds.
In addition to Zurich Life, regular investment products are offered by Irish Life, New Ireland, Aviva and Standard Life. An advantage of such funds also is that they typically offer easy access; so you can decide to stop payments going in, or take all your money out, if you wish.
Watch out for costs when choosing a regular savings fund: while you can’t control future performance, you can control how much is taken out in fees and charges. Charalambous suggests you get the fee structure in writing from the various providers – many are sold heavily through the broker network – and shop around before you make your final decision.
You should be asking what the allocation rate is – “how much of your money is physically invested every month” – what the management charge is and the broker’s fee. In addition, you’ll need to consider the Government levy of 1 per cent.
Exchange-traded funds (ETFs) can offer a cheaper option, given annual fees of as low as about 0.1 per cent. However, they can be tricky for Irish investors as you have to work out the tax owed yourself – and with regular savings, you may have to do this every month, while you will also face stockbroking fees.
Another option is to buy shares. It can be potentially very lucrative – shares in Apple, for example, have risen almost sixfold over the past 10 years. But such a concentrated approach can also be risky.
“The stock can go to zero and you can lose everything,” warns McTaggart.
Tax implications
When saving for a child, you will need to think about the tax considerations of doing so. Should you save in your own name, when it comes to handing over the funds it will be deemed by Revenue to be a “gift” and thus potentially subject to gift tax (CAT) at a rate of 33 per cent. While a child can inherit €335,000 tax-free from their parents, meaning no tax will likely have to be paid, it will reduce what they can receive tax-free later in life or by way of inheritance.
To avoid this, and especially if you will likely have assets in excess of the tax-free threshold to leave to your children, you should consider putting your savings for your children directly in their name. Doing so will mean that you will be able to avail of the €3,000 annual small-gift exemption, which means that €250 a month (€500 from two parents) can be saved tax-free every month.
To fulfil Revenue obligations, such savings should typically be in a child’s name. You most likely won’t be able to do this for shares; DeGiro for example, stopped opening such accounts back in 2018 due to “stricter customer due diligence laws and regulations for people under the age of 18″ according to a spokesman for the broker.
But you can open accounts with State Savings as well as with the aforementioned life companies. Such accounts are known as trust accounts, and may come with early-exit penalties. They will convert into the name of the child 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. So you need to be very sure that you can afford to part with the funds.
Secondly, when the child is 18 they will be legally entitled to access the money. Many parents might baulk at the prospect of a child suddenly having access to such a significant lump sum.
McTaggart says many parents simply don’t tell their children about the money they have saved for them until the time comes when it is required. However, he thinks there is merit in doing so to help their adult children better understand how their finances work.
“We can take the opportunity at 18 to educate them of the benefits,” he says.
Charalambous agrees: “We need to ensure our children understand about managing money, rather than just build up money for them.”
