BY JOHN ELLIS, FINANCIAL ADVISOR
Last edition we looked at the cost of free education for our children. As we saw if your child lives away from home, you could expect to pay over €11,000 a year on average for bills and accommodation. (Source: DIT: Campus Life)
So, if you are in a position to put aside money toward your children’s or grandchildren’s education, before you commit there are some things to consider before you start saving.
Tempting as it may be to transfer some of your savings over to your grandchildren, it is important to look after yourself first.
Know how much you can afford to save for others, after your own needs are met.
Consider where best to save. This decision will be influenced by the amount you have to save and over what time.
Finally, decide how to gift any money as red tape can surround these payments, particularly in the form of Gift Tax.
Whatever avenue you follow, use it to maximise the Gift Tax allowance. This allows you to give tax-free money to the child making full use of the annual Gift Tax exemption limit of €3,000 from any individual (€6,000 from a married couple).
Having taken due consideration, the next step is how and where to save.
One website I found helpful is Bonkers.ie, the comparision website. Here you will be able to see what’s available across a wide range of savings account with the various institutions. The shocking thing is that there is little or no return on your money and this can be a problem especially when inflation is taken into account.
But again, care is required with an insurance-based product, what we call a Child Savings Plans, as not only is interest or growth at risk, some or all your capital can be at risk too.
Let’s assume you want a no risk saving plan.
Advantages
Easy to access and relatively straightforward when they are set up.
Savings are quite a secure way of putting money aside while ensuring that the funds are easy to access if and when they’re needed.
Your money is covered by the Deposit Guarantee Scheme, meaning should the institution regulated by the Central Bank fail, your deposits up to a maximum of €100,000 is guaranteed.
Disadvantages
Low to zero interest rates in current climate.
Inflation can play havoc with your capital.
Easy access can lead to the temptation to dip.
Let’s assume you are prepared to take some risk with your savings and are prepared to invest, say, for a period not less than 10 years. What then are the advantages and disadvantages of the Child Savings Plan?
Advantages
The policy is assigned to the child, meaning, the child is the full and beneficial owner of the assets within the Child Savings Plan.
All premiums/contributions made to the Child Savings Plan are deemed to be paid to the child, the child has beneficial entitlement and is in possession of those premiums.
By investing €3,000 each year (or €6,000 for a couple) the child will not incur a gift tax liability nor will the relevant threshold for CAT purposes be impacted upon. Exit Tax will still apply.
The policy can still be encashed whilst the child is a minor by his/her parents/guardians however the money received must be for the full benefit of the child.
Disadvantages
Fund switching is not allowed on the Child Savings Plan, therefore careful consideration as to the initial fund(s) chosen must be made by the parent(s)/grandparent(s).
Further to this, as the child is the owner of the policy through the assignment, it is not possible to have his/her parents switch the funds.
As the child will be a minor, it is not possible to receive instruction from a minor to make amendments to the policy.
There is no excuse not to better inform yourself on this or any financial issue under the sun. Contact your Financial Advisor, attend seminars, webinars, read, search the internet. – when it comes to financial information, you are not alone! For more visit: ellisfinancial.ie
