# 18 year old - best investment?



## hubble (29 Dec 2020)

My daughter is turning 18 shortly.  She has 5K in a deposit account from various gifts.  Someone suggested to me that she should set up a PRSA for tax free accumulation.  I will be paying for her college education.  What do you think is the best way to invest the deposit and possible future small gifts?


----------



## Marc (29 Dec 2020)

I set out some of the arguments for making a payment to a PRSA at 18 in this blog post 









						I don't believe in Pensions - Everlake
					

Why everyone should start paying into a pension as soon as they can




					globalwealth.ie


----------



## messyleo (29 Dec 2020)

Is your daughter actually paying tax though?


----------



## Marc (29 Dec 2020)

Tax relief can be carried forward indefinitely


----------



## Brendan Burgess (29 Dec 2020)

Hi hubble

Your daughter should not contribute to a pension.

Even if someone can use a set of assumptions to show that by age 65, she will be financially better off, she will have better use for that money over the next 10 years or so.   She might use it as the start of a deposit on a house. She might use it to travel after college.  She might use it so that she does not need to work  nights while in college.

Even if she does not use it until she starts working, she can then get better value by contributing it then to a pension and getting tax relief on it when she is paying tax at her marginal rate.

Brendan


----------



## Brendan Burgess (29 Dec 2020)

She should simply buy an ETF and sit on it until she needs it.

It will go up and down in value.  And it will be a useful lesson in the stockmarket. 

Brendan


----------



## Marc (29 Dec 2020)

Estimated cost of professional advice to ensure tax compliance with an ETF purchase €750 plus Vat.
That’s 20% of that investment gone and you would be paying away 41% of any profits


----------



## moneymakeover (29 Dec 2020)

would there be income tax for a college going student with no income?


----------



## moneymakeover (29 Dec 2020)

Suggest, sign up to degiro and pick an etf
eg 
iShares S&P 500 ISSP
Vanguard S&P500


----------



## Marc (29 Dec 2020)

would there be income tax for a college going student with no income?

That’s an important point.
All income and gains are subject to a flat rate of exit tax of 41% even for non taxpayers with no earned income.
So an ETF in this situation is a very poor suggestion
Very unfair to both students and retired people.
We can of course get around this if you have 100 grand or more but in this case it’s looking like
State Savings Certs for money that needs to stay in cash and the balance to a PRSA actually represents the mathematically optimum strategy here


----------



## messyleo (29 Dec 2020)

I hate to say this, but thinking back to when I was 18, let the poor girl live a little - she will be saving and working and thinking of a pension for long enough. Maybe she wants to travel, or put it towards college expenses etc. If this year has taught us anything, it's that it's ok to live a little in the moment - yes pensions are crucial, but at 18, you also need to enjoy yourself - life is too short!

Have you asked her what she wants to do with it? She is 18 and it is her money after all!


----------



## Marc (29 Dec 2020)

You’ve uncovered the fundamental weakness with AAM we don’t get to meet the lady in question.

Economists use the term utility to describe the pleasure or satisfaction that a consumer obtains from his or her consumption of goods and services. ... Utility is a subjective measure of pleasure or satisfaction that varies from individual to individual according to each individual's preferences.

We don’t know her preferences and therefore can only postulate what is “best” for her in an abstract mathematical sense.

It really does hit home the need for face to face advice when making these sorts of decisions


----------



## Brendan Burgess (29 Dec 2020)

Marc said:


> You’ve uncovered the fundamental weakness with AAM we don’t get to meet the lady in question.



Hi Marc 

This is a bit of an unusual question in that the poster is asking on behalf of someone else. Most posters ask about their own situation.



Marc said:


> We don’t know her preferences and therefore can only postulate what is “best” for her in an abstract mathematical sense.



Looking for a mathematical answer is the wrong approach here.  We do not know her future needs and neither does she. So for that reason, she must keep it outside a pension.

An execution-only ETF seems like the best idea.

Brendan


----------



## Marc (29 Dec 2020)

Brendan

An observation this would be the case in 100% of posts involving saving for a minor, as it would a bare trust or similar solution; and I would venture, most cases involving a young adult with little or no investment experience.

By your reasoning nobody would ever invest because the future cannot be known with certainty so therefore everyone should always save in a traditional bank account.

that is patently not the case, and some people decide to invest some of their money as a form of deferred consumption having taken care of immediate saving needs.

so if it is the case that she could/should invest some of it then the question is simply what it is the most suitable and appropriate investment?

my blog post argues that many people don’t make pension contributions in their early life partially because well meaning people advise them against it - as indeed you are doing.

they conclude, as you are doing, that there are better uses for “this money” in the future so therefore they should never commit it to a pension.

this is completely missing the point of my argument.

I am saying she should not invest in an ETF because in a very real and practical sense it is wholly unsuitable for the vast majority of Irish resident investors once one factors in the tax compliance issues which you gloss over in your response.

she could invest in an Irish unit linked policy from an insurance company but arguably should not do so either since net of cost and tax she is unlikely to make a profit in excess of a state savings certificate from a suitable balanced investment strategy which reflects the uncertainty around her future potential need to access the savings - your point.

so the logically conclusion is therefore that she should keep most of the capital in a state savings certificate as we set out here









						How Do I Get The Best Return On My Savings? - Everlake
					

We strongly advocate that longer-term investments should be arranged via pensions and stock-market linked investment accounts.




					globalwealth.ie
				




but make a modest contribution to a PRSA with a very high equity content.


if you have an age related allowance of 15% and pay say, €500 into a pension you obtain tax relief of 15% of €1525 or €228.75 which represents an effective rate of tax relief of 45.75%

the combined return of this strategy including the tax relief carried forward will under most circumstances provide a higher overall return net of costs and tax and certainly a higher return than an ETF net of tax and penalties for screwing up the tax return.

A detailed analysis of the comparison between gross roll up in a pension vs a taxable investment subject to exit tax are set out here




__





						Personal Savings Accounts - Everlake
					

This guide sets out how a Personal Retirement Savings account (PRSA) combined with an Approved Retirement Fund (ARF) can be used by any Irish Investor between the ages of 18 and 75 to invest personal savings in a tax efficient way




					globalwealth.ie


----------



## Gordon Gekko (30 Dec 2020)

Any type of pension structure probably misses the point. This is an 18 year old whose college education is being funded by the Bank of Mum and Dad. It’s more likely that the cash will be required as part of a house deposit in circa 10 years. I’d invest it in an Investment Trust, something like that F&C one which is quite diversified and subjec to ‘ordinary’ tax treatment. Or take a punt and buy something more racy like Scottish Mortgage Trust.

Or does she need/want a car?


----------



## Marc (30 Dec 2020)

another possible fall out from Brexit is that U.K. investment trusts could go the way of non-EU ETFs.

at present they are regulated as AIFM with an EU Kid document but post 1/1/21 they are going to be treated as a “complex instrument” by some EU trading platforms.

We won’t know for sure until March when the equivalence regime is confirmed but it’s definitely in the balance.


----------



## Brendan Burgess (30 Dec 2020)

Gordon Gekko said:


> Any type of pension structure probably misses the point.



This is the point that I am trying to make.  

A pension is completely inappropriate. She does not know when she will need this money, but it's very likely to be in the medium term. She won't thank you Marc,  in 47 years time, for having got a higher return on her money, but she could not afford a car or a house.

Brendan


----------



## messyleo (30 Dec 2020)

If she is starting college next year I would say she will likely need some of it in the short term (depending on covid restrictions of course) also e.g. the next 1-2 years. The life of a student these days is very much travel, socialising, extra curricular expenses etc. Most students work part-time but even then it's difficult to keep up financially even if your parents are helping and she will likely need a "rainy day fund". Also the parents idea of "paying for college" may be fees and rent - there are a lot more expenses in reality which teh girl may have to fund herself in terms of lifestyle etc! I think some people are quite disconnected from the modern student lifestyle and the priorities of younger people  When she finishes college at 22 or whatever, and gets her first proper job, t's time enough to look at a pension imo!


----------



## Marc (30 Dec 2020)

And this is exactly why the country is under provided in terms of pension coverage.

you are “anchoring” your arguments only to the facts presented without making any 2nd stage analysis.

Let’s take a really simple two stage example

she puts €4,500 into a state savings certificate earning 1% tax free and €500 into a PRSA

Over the next 5 years her state savings will grow to €4,750 give or take what she started with no material impact on her ability to use her savings.

As noted the income tax relief on the PRSA is equivalent to a guaranteed return of almost 50%

Let’s say she starts work after college and of course can then deduct the €228.75 as a tax deduction.

Her pension investment will grow completely tax free no tax returns to deal with no minimum fee brokerage charges or stamp duty. Just a simple clean investment wrapper which facilitates small monthly contributions of just €50pm.

In equities over 5 years her €500 might be worth €669 with no immediate tax to pay on the profit. Whereas an ETF would be worth say €600 after tax.

so the combination of the income tax relief plus the tax free returns make this unquestionably the best return she could possibly assume to make on, and this is critical, a modest sum.

These post all assume that investing in an ETF as a taxable investor in Ireland is like jumping on the Luas. Show me what it costs to buy €500 worth of an ETF and properly account for the tax liability for no higher expected return and makes saving €50 pm possible in a taxable environment- go on please I’m waiting.

Explicitly the poster also mentioned future small gifts.
Materially impacting on the amount of cash she will have available at any given point in the future. This isn’t “all the money in the world” and needs to be wrapped in cotton wool but suggestions to gamble away with an ETF make no sense at all


----------



## SGWidow (30 Dec 2020)

How much will in cost in professional fees to set up a PRSA?


----------



## hubble (30 Dec 2020)

Many thanks for your kind posts.

1. My initial thoughts were to set up an ETF.  I think I tried to do it for her with an online broker a few years ago but came to the conclusion that it was not worth the hassle given that she is a minor and I said let her set up her own trading account when she turns 18. This would give her some exposure to managing her money with an exposure to the stock market.  Also I wouldn't advise her to buy individual stocks.  An All World ETF maybe.
2. The thinking above would be that she would have gained a small amount of education in finance with access to the money for a house deposit in 10 or more years or whenever.
3. There may be small gifts up to the CAT limit over the next few years which would also help in accumulating a house/apartment deposit.
4. She could spend some of the money travelling or whatever.
5. However the PRSA idea was said to me in recent times.  It had never occurred to me.  She has no income and is unlikely to work during college term.  She may work in the summers. I was not aware that you could carry forward tax deductions on a pension, if that is the case.
6. Maybe she should set up a PRSA and online trading account.  Or simply leave the money in the bank or post office and let it accumulate for a house deposit or medium term use!


----------



## Gordon Gekko (30 Dec 2020)

Marc said:


> And this is exactly why the country is under provided in terms of pension coverage.
> 
> you are “anchoring” your arguments only to the facts presented without making any 2nd stage analysis.
> 
> ...



My own “tuppence” is that your advice is overly complex, overengineered, and probably suboptimal. However, more detail regarding the individual’s circumstances is required.


----------



## Marc (30 Dec 2020)

How much will in cost in professional fees to set up a PRSA?

I can only speak for my own business but for our wealth management clients we provide pro-Bono advice to our clients children up to the age of 30.

So for my clients at least, literally nothing


----------



## NoRegretsCoyote (30 Dec 2020)

hubble said:


> Or simply leave the money in the bank or post office and let it accumulate for a house deposit or medium term use!



To me this makes most sense.

The sums involved are small, it is not serious wealth.

For this amount at 18 there are many things (education, travel) that could pay off in the long run much more than financial returns.


----------



## joe sod (30 Dec 2020)

Marc said:


> another possible fall out from Brexit is that U.K. investment trusts could go the way of non-EU ETFs.
> at present they are regulated as AIFM with an EU Kid document but post 1/1/21 they are going to be treated as a “complex instrument” by some EU trading platforms.


but sure why would that be an issue, aren't non-EU ETFs treated like shares anyway ? There are whole discussions on the ETF threads about ways to buy US domiciled ETFs for that very reason because they have the tax advantages. Is it the case that it might be more difficult to buy and sell these on EU platforms rather than the tax treatment being the issue. Afterall they can't single out UK investment trusts for different tax treatment when they dont do it with US ETfs and funds.


----------



## Marc (30 Dec 2020)

thanks for acknowledging one of my points.

This is not to do with tax, this is to do with the distribution and marketing of Third county funds in the EU by regulated entities.

UK investment trusts could go the same way as non-EU etfs did recently when the PRIIPs regulations came out.

putting all of these investment options effectively out of reach for EU retail investors


----------



## Brendan Burgess (30 Dec 2020)

Marc said:


> so the combination of the income tax relief plus the tax free returns make this unquestionably the best return



But Marc 

The best return up to the age of 65 is not what she wants!   You have been told that repeatedly.

She wants access to the money now and in the next few years.  

Brendan


----------



## SGWidow (30 Dec 2020)

I must admit finding Marc's posts a little irritating.

Within not such a long thread, we have


Marc said:


> Estimated cost of professional advice to ensure tax compliance with an ETF purchase €750 plus Vat.


When it suits one argument

and 



Marc said:


> How much will in cost in professional fees to set up a PRSA?.........So for my clients at least, literally nothing


When it suits a different argument


Mixing apples and oranges in this way is boards.ie level discussion.


----------



## Marc (30 Dec 2020)

From the original post “What do you think is the *best way *to invest the deposit and possible future small gifts?”

“But Marc

The best return up to the age of 65 is not what she wants! You have been told that repeatedly.

She wants access to the money now and in the next few years.”

you are all of course entitled to your own opinions sadly not your own facts


----------



## Gordon Gekko (30 Dec 2020)

Marc,

I have to admit I am growing really tired of your long-winded posts, your constant advertising, and the way you always seem to overcomplicate things.

Good financial advice should be easy for the recipient to understand.

I think that on balance your contributions to this forum do more damage to your business than anything else. I’m not a fan of ‘brokers’ per se, but I much prefer the relaxed style of an ‘SBarrett’ for example. I wouldn’t hesitate to talk to him if I needed to, and there are others here to be fair.

“Keep it simple”


----------



## Sarenco (30 Dec 2020)

Am I the only one that thinks this thread is completely surreal?

An 18 year-old student could easily spend €5k  in a single year - even if living at home and having her tuition costs met by a parent.  

The idea of investing any money in equities - in whatever vehicle - that might be required within a year seems like a bad idea to me.


----------



## SGWidow (30 Dec 2020)

Sarenco said:


> Am I the only one that thinks this thread is completely surreal?



No


----------



## messyleo (30 Dec 2020)

Sarenco said:


> Am I the only one that thinks this thread is completely surreal?
> 
> An 18 year-old student could easily spend €5k  in a single year - even if living at home and having her tuition costs met by a parent.
> 
> The idea of investing any money in equities - in whatever vehicle - that might be required within a year seems like a bad idea to me.




Praise be!! In short, to answer the subject of thread imo:

18 year old - best investment? Life experiences / living (and also maybe just let her do what she wants with it herself!)


----------



## NotMyRealName (1 Jan 2021)

I'm new to this forum but find this a very interesting discussion. I've a  similar situation with my daughter. Amount of capital is larger though. After much investigation, including bare trust, I decided to go with execution only with her own DeGiro account ( now she's 18) and 1 emerging mkts and 1 all world fund. Bit of thinking and work involved and hope......sure you pay tax on early disposal or 7 year deemed disposal....but you can't avoid death and all taxes. If she starts employment after college, well then maybe liquidate account and use it to start a PRSA.


----------



## Geoff Tipps (5 Jan 2021)

Interesting discussion. Perhaps I'm being overly simplistic here but I don't see what's so complicated about buying an accumulating ETF on Degiro and filing a return after 8 years to pay the 41% tax on the gain. Let's not over egg the pudding here! 750 euro + VAT??


----------



## Leper (6 Jan 2021)

The young lady is 18 and all her life is ahead of her. Keeping the money in any financial institution will teach her that the value of it is being flushed down the waste pipe "exponentially" every month.

She is about to start college. If I were her I'd be using the money there to in some way allay the 3rd level costs from her parents. She is young and probably wants to enjoy life a bit too. Talks of financial this or financial that are likely driving her around the bend. Let her enjoy a few bob for Crying Out Loud. Unless . . . . . . . she is Greta Thunberg.

OK! some investment advice for a low money investor:- Buy some art painting and if you use your head you should turn a good profit in a year or two even after commissions.


----------



## Brendan Burgess (6 Jan 2021)

Leper said:


> Buy some art painting and if you use your head you should turn a good profit in a year or two even after commissions.



What? 

You can't be serious? 

Art should never be an investment for anyone because of the high costs of buying and selling and the odd nature of the market. The vast majority of art works fall in value, often to zero. 

It definitely should not be an investment for low earners.

Brendan


----------



## Leper (6 Jan 2021)

Brendan Burgess said:


> What?
> 
> You can't be serious?
> 
> ...


If I can turn a few bob buying the occasional landscape painting so can you and I ain't Gordon Gekko.


----------



## Brendan Burgess (6 Jan 2021)

Leper said:


> If I can turn a few bob buying the occasional landscape painting so can you



If you have done, then you have been extremely lucky.  Alternatively, you have some astonishing skill.  I don't have such a skill and I very much doubt that an 18 year old student would have either.


----------



## Leper (6 Jan 2021)

Brendan Burgess said:


> If you have done, then you have been extremely lucky.  Alternatively, you have some astonishing skill.  I don't have such a skill and I very much doubt that an 18 year old student would have either.


I don't have any astonishing skill, but I am not in the big league. Occasionally, I buy a piece from an Irish artist (never spent >€300.00). I'd hold onto the picture for perhaps 2 years and even change the frame before selling it on. Sometimes it's the source of the painting (especially if it has some sort of story with it) will increase the value.

I should add painting is a continuous hobby for me (I've even sold some). Like I already said, I'm no Gordon Gekko but with a little bit of knowledge and the ability not to get too attached to a painting you can turn a profit. It'll never be or near a fulltime occupation for me. Perhaps I've had some luck too? - But, you make your own luck.

Incidentally, all our offspring buy and sell art works too and they themselves are pretty good artists. Producing art is like showbusiness and like showbusiness you must know your audience.


----------



## abc_xyz (7 Jan 2021)

Marc said:


> if you have an age related allowance of 15% and pay say, €500 into a pension you obtain tax relief of 15% of €1525 or €228.75 which represents an effective rate of tax relief of 45.75%



I don't understand this at all and don't get where €1525 came from. The age related allowance relates to how much of your income you can put in the pension not the relief on it right? So the relief would be either 40% or 20% (and 20% seems more likely as early in career salary would quite likely not result in paying 40% tax). So I thought the tax rate would either 20% or 40% not 45.75% - what am I not understanding?


----------



## RedOnion (7 Jan 2021)

abc_xyz said:


> I don't understand this at all and don't get where €1525 came from. The age related allowance relates to how much of your income you can put in the pension not the relief on it right? So the relief would be either 40% or 20% (and 20% seems more likely as early in career salary would quite likely not result in paying 40% tax). So I thought the tax rate would either 20% or 40% not 45.75% - what am I not understanding?


It appears to be incorrect, as relief is only allowed on contributions.

The idea put forward was that no matter what amount was paid into PRSA, that one would receive relief on a minimum of 1,525. However that's the minimum allowable, even if it exceeds the age related allowance.

Discussed here also: https://www.askaboutmoney.com/threa...-any-tax-relief-possible.221628/#post-1698462


----------



## Younginvestor93 (7 Feb 2021)

All depends on what type of person they are, some people would love to blow the 5k on partying, experiences, taking courses, learning a new skill, material possessions. Me personally, I would have loved to get started on my first investments. I think, seeing an investment grow can have an extremely positive impact on your life and your understanding of wealth and how investing and compound interest works. Whatever she does, I think she should at least set up an account with Degiro/Trading 212 or another alternative cheap broker, and invest even if its 100euro in an ETF. It would be a great learning experience on the power of investing.


----------



## NoRegretsCoyote (8 Feb 2021)

Younginvestor93 said:


> I think, seeing an investment grow can have an extremely positive impact on your life and your understanding of wealth and how investing and compound interest works.



And what would a big loss at an early age teach you?


----------



## Younginvestor93 (8 Feb 2021)

NoRegretsCoyote said:


> And what would a big loss at an early age teach you?


If you go all in in Game stock and lose your money, you will probably never invest again. But starting off with safe diversified equities like ETF's you can't go wrong as long as you are willing to leave it for the long term. I personally wish I learned about investing at 18. The power of compound interest is insane and the earlier you start the more wealth you will eventually accumulate.


----------



## fungie20 (8 Feb 2021)

@Younginvestor93 Do you get commission for selling ETFs or something? It's all you talk about! It sounds like you spent far too much time on the US FIRE reddit and that's all you know!


----------



## Younginvestor93 (8 Feb 2021)

fungie20 said:


> @Younginvestor93 Do you get commission for selling ETFs or something? It's all you talk about! It sounds like you spent far too much time on the US FIRE reddit and that's all you know!


Only commission with iShares, Vanguard turned me down! 
I spend too much time on fintwit but US Fire reddit, I must look into that!


----------

