Investing Children's Allowance Options

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faketales

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We are fortunate enough to be able to put the Children's Allowance for our one year old aside.However I am confused at the options.

Option 1:
An investment account in my child's name.
However I don't understand what level of tax applies to them.
Once I set it up in his name can I take the money out? Change to a different product if better value? I understand I can stop paying in.
The advantage seems to be that I can fit him the money under the small gifts allowance of 3k a year. Downside is it's his money to do what he likes with at 18. Right?

However I can pay for his college fees and accommodation exempt from CAT anyway. So if the purpose of investing the Children's Allowance is for college it doesn't really have an advantage. For the real advantage he would have to keep this money for after college.


Option 2:
An investment account in me or the wife's name that we put aside for when he needs it. This might be earlier if he had some need or there is a real family need. We can still pay for his college and if we chose could max out the gift transfer if we came across loads of case. I presume we could change product easier also?

Option 2 seems to make more sense. I am confident in our descipline not to touch it. Nor do I feel we are in a position to be handing over thousands and looking to minimise tax.

Have I got this right? I have seen this account https://www.zurich.ie/savings-and-investments/savings-options/childs-savings/

Any thoughts?





I have seen these mentioned: https://www.zurich.ie/savings-and-investments/savings-options/childs-savings/
 
Whatever about your specific questions, you might find some useful info here...


Also, it usually doesn't make sense to "silo" your savings/investments - e.g. fencing off the "college fund" from your other savings/investments - rather than taking a more holistic approach to your overall financial situation, savings/investments, debts, etc.
 
ClubMan said:
Whatever about your specific questions, you might find some useful info here...


Also, it usually doesn't make sense to "silo" your savings/investments - e.g. fencing off the "college fund" from your other savings/investments - rather than taking a more holistic approach to your overall financial situation, savings/investments, debts, etc.
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Thanks. I had searched children’s allowance but this provides better results.

I won’t disagree in theory but there is something about putting aside a separate stream of income for a specific event rather than adding it to the rest.
 
faketales said:
I won’t disagree in theory but there is something about putting aside a separate stream of income for a specific event rather than adding it to the rest.
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I've made the same mistake myself in the past...

Late 30s Couple, 2 kids, Seeking Guidance to Optimise Family Finances

Long time reader of the forum and would be very interested in people’s thoughts about our own situation. In the last 3 years my wife and I got married, had a baby, bought our first home, and replaced one car, so our savings have taken a huge hit. We also have a second baby on the way early next...
www.askaboutmoney.com
 
ClubMan said:
I've made the same mistake myself in the past...

Late 30s Couple, 2 kids, Seeking Guidance to Optimise Family Finances

Long time reader of the forum and would be very interested in people’s thoughts about our own situation. In the last 3 years my wife and I got married, had a baby, bought our first home, and replaced one car, so our savings have taken a huge hit. We also have a second baby on the way early next...
www.askaboutmoney.com
Click to expand...


Thank you. An interesting read. I tend to lean a little bit more on the value of having money siloed. My mortgage is under 60% LTV. I might like to retire when my son is in college so I need the money not just being mortgage free.

I would have thought a long term invest could beat the mortgage rate. That thread seems to focus on saving accounts.

I may also need the cash in ten years for my son if he had some special need etc. Getting the mortgage down doesn’t help me in that situation.
 
There're loads of ways to invest for your child. There is a great episode of the CrazyHouse Podcast that covers all options in depth here: https://crazyhouseprices.podbean.com/e/ep-18-how-to-invest-your-children-s-allowance/ It specifically aimed at Irish customers so it is definitely worth listening.

If you decide to go for Zurich then beware of the fees. As with any active investments, these fees will eat up your gains. But if you do decide to go for it, I would suggest you invest in Prisma 5 solely. I am guessing that you are in it for the long term.

My advice would be to aim for passive funds. So you would invest in an App like TR and you go for an All World index and some commodities like Gold, silver and others. I don't believe in the 60/40 portfolio any more. 150 per month would definitely fall under the 3k gift exemption so there is no reason to worry about CAT. But you do need to deal with the fact that the investment will be under your name. With this option, you will definitely lower the fees.
 
I absolutely value the silo approach.

Silo 1 is an investment in my child's name which nobody can touch until they reach 18. It's with Zurich and the long term post inflation and charges return should be around 7% based on past long term (40 years) performance of the indexes the funds are tracking. This fund means financing college is a non-issue regardless of my or my wife's financial situation when the time comes.

Silo 2 is my pension. This is all in the nasdaq 100 which has a long term post inflation return of 11.5%. If i get that or close to it then Silo 1 can be a house deposit instead of a college fund for the small person.

Silo 3 is my mortgage. At 2.35% fixed until early 2027 any cash left spare after Silos 1 & 2 goes in here as there's no penalty for overpayment at the moment and for the foreseeable. It has by some distance the worst expected return on investment but the only guaranteed return.

My silos are mutually supporting- Silo 1 means small person is looked after which makes silo 2 less important and silo 3 almost irrelevant from that perspective. Silo 2 potentially increases the value of Silo 1 by maybe helping them buy a house early. Silo 3 means I'll have no mortgage sooner allowing me to survive on less (silo 2) and increasing my ability to support the small person through college without recourse to silo 1.

I don't believe that you're saving for your child if the account/investment is in your name. My wife gets the children allowance into a separate account which we use for their clothes etc. But it's her money not the child's. The one I have is the child's. I'm not saying one is better than the other (and they're both reasonable approaches) but they are not the same.
 
Interesting approach @SquirrelChaser

For Silo 1, did you factor in the deemed disposal rule as it will kill off any compounding. I know the DD is currently under review but still...

Also for Silo 3, did you take into account the cost of maintaining the house even after you have paid off your mortgage? As well as the opportunity cost that comes with mortgages?

Seems like you made some very optimistic assumptions but your approach seems very well thought.
 
SquirrelChaser said:
I absolutely value the silo approach.

Silo 1 is an investment in my child's name which nobody can touch until they reach 18. It's with Zurich and the long term post inflation and charges return should be around 7% based on past long term (40 years) performance of the indexes the funds are tracking. This fund means financing college is a non-issue regardless of my or my wife's financial situation when the time comes.

Silo 2 is my pension. This is all in the nasdaq 100 which has a long term post inflation return of 11.5%. If i get that or close to it then Silo 1 can be a house deposit instead of a college fund for the small person.

Silo 3 is my mortgage. At 2.35% fixed until early 2027 any cash left spare after Silos 1 & 2 goes in here as there's no penalty for overpayment at the moment and for the foreseeable. It has by some distance the worst expected return on investment but the only guaranteed return.

My silos are mutually supporting- Silo 1 means small person is looked after which makes silo 2 less important and silo 3 almost irrelevant from that perspective. Silo 2 potentially increases the value of Silo 1 by maybe helping them buy a house early. Silo 3 means I'll have no mortgage sooner allowing me to survive on less (silo 2) and increasing my ability to support the small person through college without recourse to silo 1.

I don't believe that you're saving for your child if the account/investment is in your name. My wife gets the children allowance into a separate account which we use for their clothes etc. But it's her money not the child's. The one I have is the child's. I'm not saying one is better than the other (and they're both reasonable approaches) but they are not the same.
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Interesting. Can I ask which Zurich investment it is and what fees you pay? How does the tax work in this product? Is it a case that they just do all the deemed disposal at 41% for you? I presume this would change if the rules did?

If it is in your child's name can you access it early if need be? Change the plan / move the money if not happy with performance?
 
faketales said:
Interesting. Can I ask which Zurich investment it is and what fees you pay? How does the tax work in this product? Is it a case that they just do all the deemed disposal at 41% for you? I presume this would change if the rules did?
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The following is incorrect so ignore...

Deemed disposal rules are unlikely to change for life insurance collective investments such as unit linked funds or UCITS. The recent talk is specifically about ETFs which are a different kettle of fish.
 
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ClubMan said:
Deemed disposal rules are unlikely to change for life insurance collective investments such as unit linked funds or UCITS. The recent talk is specifically about ETFs which are a different kettle of fish.
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23. The following reforms to the taxation of Irish-domiciled life products, with similar amendments made to theequivalent products in EU, EEA and OECD territories, to bring the regime into closer alignment with the taxation on other savings and investment products:
• Remove the eight-year deemed disposal requirement
• Align the IUT and LAET rate of tax with the CGT rate (currently 33%) (Life Assurance Exit Tax)
• Allow for a limited form of loss relief
• Repeal the 1% Life Assurance Levy

24. The Life Assurance – Old Basis Business regime should be wound down, following detailed consultation to mitigate risks for policyholders.

Gerard

www.investandsave.ie
 
ClubMan said:
Deemed disposal rules are unlikely to change for life insurance collective investments such as unit linked funds or UCITS. The recent talk is specifically about ETFs which are a different kettle of fish.
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The report is about all Irish-domiciled funds including ETFs and unit linked funds.
 
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franc82 said:
Interesting approach @SquirrelChaser

For Silo 1, did you factor in the deemed disposal rule as it will kill off any compounding. I know the DD is currently under review but still...

Also for Silo 3, did you take into account the cost of maintaining the house even after you have paid off your mortgage? As well as the opportunity cost that comes with mortgages?

Seems like you made some very optimistic assumptions but your approach seems very well thought.
Click to expand...
Deemed disposal has a significant impact but it's charged on gains- it's not like it wipes them out so the benefits of compounding are still there. They're lower than they would be without DD but it's wildly misleading to say it'll kill off any compounding.

If by opportunity cost, you mean the foregone opportunity to invest the overpayment? Yes, mathematically I'd be better off throwing the money into another investment, but i want the mortgage gone. And the costs of maintenance are there regardless of the mortgage so not really a factor in my decision making. (Edit- if you mean the opportunity to enjoy life, also no- we're taking at least 2 foreign holidays a year, and while we're not constantly throwing cash at shiny stuff, there's not much we want that we don't have).

If by optimistic assumptions you mean the returns on investments for silos 1&2, not really. The numbers quoted are based on compounded returns for S&P 500 and Nasdaq 100 over last 39 years net of Irish inflation. My assumption is that over the next 39 years the returns will be at least two thirds of that.

The standard Zurich Child Investment. Google it. Fees are about 1%, they do all the tax & Deemed Disposal.



It's locked up in those funds until little one is 18. No early access because it's not my money anymore. That's the whole point.



So far (a bit over 2.5 years) the after tax value is about 25% higher than total contributions. That rate of return will inevitably drop towards the mean over time though obviously.
 
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SquirrelChaser said:
Deemed disposal has a significant impact but it's charged on gains- it's not like it wipes them out so the benefits of compounding are still there. They're lower than they would be without DD but it's wildly misleading to say it'll kill off any compounding.

If by opportunity cost, you mean the foregone opportunity to invest the overpayment? Yes, mathematically I'd be better off throwing the money into another investment, but i want the mortgage gone. And the costs of maintenance are there regardless of the mortgage so not really a factor in my decision making. (Edit- if you mean the opportunity to enjoy life, also no- we're taking at least 2 foreign holidays a year, and while we're not constantly throwing cash at shiny stuff, there's not much we want that we don't have).

If by optimistic assumptions you mean the returns on investments for silos 1&2, not really. The numbers quoted are based on compounded returns for S&P 500 and Nasdaq 100 over last 39 years net of Irish inflation. My assumption is that over the next 39 years the returns will be at least two thirds of that.

The standard Zurich Child Investment. Google it. Fees are about 1%, they do all the tax & Deemed Disposal.



It's locked up in those funds until little one is 18. No early access because it's not my money anymore. That's the whole point.



So far (a bit over 2.5 years) the after tax value is about 25% higher than total contributions. That rate of return will inevitably drop towards the mean over time though obviously.
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Indeed the DD is computed on the gain not on the capital that is exactly why it cancels out compounding. It is also the same reason why there is no DD on pension for instance.

Yes, Zurich will take care of tax and DD but it comes at a cost to you which should, by no means, be underestimated.

When computing the cost of mortgages, the 'hidden' cost should be accounted for. I barely see people discussing it on this platform. The first one being the sheer amount of interest paid on the mortgage itself.

But I agree that it is a good to set some money aside for our children, it is how it should be done that seems to be a matter of personal circumstances.
 
@franc82
franc82 said:
it is how it should be done that seems to be a matter of personal circumstances.
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I'm curious to know what other means are available to invest for a child other than through Standard Life / Zurich / any other Life Assurance fund company? Yes, if you do it via Standard Life / Zurich / any other Life Assurance fund company there's a DD and yes, there's management fee (and I think Zurich is the most expensive one), however let's not forget that all such investment is not counted against a lifetime non-taxable 400k limit (in case if you invest <=3k per parent, etc.) and that's the whole point for many many parents.

I'm not aware of any ways to open an investment account on the name of a child (under 18y old). I might be not aware of something?
 
franc82 said:
Indeed the DD is computed on the gain not on the capital that is exactly why it cancels out compounding. It is also the same reason why there is no DD on pension for instance.

Yes, Zurich will take care of tax and DD but it comes at a cost to you which should, by no means, be underestimated.

When computing the cost of mortgages, the 'hidden' cost should be accounted for. I barely see people discussing it on this platform. The first one being the sheer amount of interest paid on the mortgage itself.

But I agree that it is a good to set some money aside for our children, it is how it should be done that seems to be a matter of personal circumstances.
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The DD significantly reduces the effective rate of return for sure as does the management charge to Zurich. But there's a huge difference between reduction and elimination of compounding. It's still a very reasonable expectation to come out well ahead of inflation unless the investment is stupidly conservative based on bonds rather equity, in which case you'd be better off putting it in the credit union.

For me the hidden cost of NOT overpaying my mortgage is that I'd have to work until I'm 65, in which I've not the slightest interest. I get where you're coming from on interest, but I think most people probably focus on the monthly expense. I'll save interest by overpaying for sure, but mostly i want the freedom that not having that commitment every payday offers.

I think everyone should provide for their kids future. I'd say nearly everyone could find €25 a week to put aside (although it's far more difficult for some obviously). That's life changing if it enables them to go to college at 18, or buy a home at 23, or even spend a year traveling (where in my experience you'll learn more than 4 years in college)- and all for less than the cost of a weekly takeaway....
 
Sorry I meant DD significantly reduce the return not nullifying it. I was under the impression that @SquirrelChaser wasn't aware of it.

By hidden costs, I meant maintenance costs which are going to rise as the house gets older, interests on the mortgage and others.
 
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