Save for your children: yes, but how?

Your children may be carefree, but as parents you have to think ahead. After your baby is born or later on, you plan for the future: education, first home, even first car or wedding. When the time comes, a little helping hand from you will clearly be welcome. And it all starts now! Here are a few of the savings solutions available to you.

With a twinkle in their eye, your child drops the coin that you have just given them into their piggy bank and you stop to consider how you can secure their future. Good news! To encourage client loyalty, banks offer some ingenious ways of answering your legitimate concerns on this matter. Here we review some of the most common solutions in Luxembourg. The solutions available have varying appeal depending on your personal values, financial standing and horizon, as well as the purpose of the savings that you hope to accumulate.

Savings account: good, but…

When children are born, banks hurry to offer you a savings account in their name. They often come with the promise of security, a special interest rate, no account fees, and a small bonus to start you off. Once the account has been opened, you and your loved ones can pay into it, as can your children once they reach a certain age. So it would appear to be the ideal solution. True, except you have to remember that:

• the special rate is only marginally higher than a standard savings rate. In other words, it is pretty unattractive in the current economic conditions.
• if the account is in your child’s name, the funds belong to them, not you. So there is no possibility of dipping into it to buy that great sofa you see on sale. The only withdrawals permitted, whether complete or partial, are those “in the child’s interests”.
• once they turn 18, your children will have free access to the funds, even if only to party with friends or buy things that you consider pointless, rather than pay for their studies or first car.

If the account is in your child’s name, the funds belong to them, not you. (…) The only withdrawals permitted are those in the child’s interests.

If you feel that the benefits are not worth the risk, you can always open a savings account in your own name. No more bonus, but you have control over the account and can decide for yourself when your children are mature enough to receive their money.

The “insurance” policy: all good things…

For your offspring aged up to 25, depending on the bank, there are also life insurance arrangements that in theory combine a degree of flexibility and security with a higher return than you would get on a standard savings account. The icing on the cake is a tax allowance of up to EUR672/year, provided that you hold the policy for at least 10 years. This limit is doubled for your spouse/partner (provided that you are taxed jointly) and each child in the household. At the end of a ten-year period, the capital and interest is exempt from income tax in Luxembourg.

In the event that the insured adult dies, the insurance company pays the premiums on their behalf and thus ensures that your child receives the capital foreseen at maturity.

With this type of fixed policy, you know the amount of guaranteed capital paid to your child at the end of the policy. You just have to make the monthly, quarterly or annual premium payments throughout its duration. The premiums paid attract the rate of interest applicable when the policy is taken out, minus fees. Depending on the arrangement, this interest may be topped up with a share of the insurance company’s profits.

In the event that the insured adult dies, the insurance company pays the premiums on their behalf and thus ensures that your child receives the capital foreseen at maturity

Despite its many benefits, this arrangement is not without its limitations. Apart from the 10-year minimum holding period for obtaining tax allowances, you have to pay premiums on fixed dates, while penalties for surrendering the policy early can be heavy.

Mortgage-savings: bricks and mortar…

Put simply, a mortgage savings plan is an account intended to be used for the purchase of a future home. Apart from securing the capital and return, this arrangement is more flexible than a life insurance policy in terms of the amount and frequency of payments. However, it limits the use that may be made of the savings accumulated, if you want to enjoy the tax benefits.

The tax reform that entered into force on 1 January 2017 limited the tax benefits of mortgage savings to personal homes, i.e. investing in a primary residence. However, it doubled the annual allowance on payments into the plan to EUR1,344 from EUR672 for a taxpayer aged between 18 and 40 at the start of the tax year. This limit is doubled for your spouse/partner (provided that you are taxed jointly) and each child in the household. Lastly, the credit interest on a mortgage savings plan, credited each year, is not subject to the withholding tax in Luxembourg.

(…) the credit interest on a mortgage savings plan, credited each year, is not subject to the withholding tax in Luxembourg.

At the end of the plan the mortgage savings provider partnering with your bank offers you the possibility of taking out a mortgage at an attractive fixed rate to finance your property purchase. This rate is then set when you sign the plan

Investment fund savings scheme: attractive, but not without risk…

Often offered in the form of a SICAV investment plan, this arrangement is the one that provides the highest potential return. Naturally, it also carries the highest risk as the aim is to grow your savings on financial markets. If you are interested, the best advice that we can give you here is to contact an expert in the field rather than continuing your research online. This is because the arrangement that suits you best will depend a great deal on your plans and investor profile.

One aspect in which you should be careful: if you open the savings plan in your name, find out beforehand what taxation will apply when you transfer ownership to your child. And if the plan is opened directly in their name, bear in mind that they can access it freely as soon as they reach the age of 18.