Preparing for the future

Saving for your children and teaching them how to manage money.

Who really teaches children how to handle money? Personal finance and money are issues that are barely touched on at school, and families too sometimes fail to communicate properly on these topics. But money should not be a taboo subject in a child’s upbringing, regardless of whether your financial situation is good or bad. How can a child learn how to manage money if you never talk about it at home?

It’s very appropriate to make money a topic for discussion in a child’s upbringing. The same applies to the various options you have for providing for the financial future of your children. For parents, it’s worth planning early for your children’s future, their education, first flat or even first car, or their wedding. There are several savings solutions for this.

The simple solution: a savings account

Banks let you open a savings account in a child’s name from birth. These accounts are often associated with the promise of security, a preferential interest rate, free account management and an opening bonus of few euros. Once the account has been opened, parents, relatives and friends – and from a certain age the child too – can deposit money in the account. Overall, it’s the perfect solution. Though you should bear in mind that the preferential interest rate is barely higher than that of a standard savings account. Basically, this interest rate is not very attractive in the current economic environment.

If the account is opened in the child’s name, the money belongs to the child and not the parents.

If the account is opened in the child’s name, the money belongs to the child and not the parents. Once the child reaches adulthood, they have full access to the money. They can spend it on a party with friends or buy things that parents may find rather pointless; they are under no obligation to save it for their education or first car.

The life insurance option

There are also life insurance products for children, which vary from bank to bank. These offer a certain amount of flexibility and security and generally a higher return than a simple savings account. In addition, premium payments of up to EUR 672 per annum are tax deductible, providing that the policy runs for at least 10 years. Your spouse or civil partner is also eligible for a tax deduction of the same amount, and the same tax advantage is available for every child in the household. After 10 years, the capital and interest are exempt from income tax in Luxembourg. In the event of the death of the insured adult, the insurance company takes over the contributions, thus ensuring that the child receives the anticipated capital amount at the end of the policy.

This type of policy guarantees the capital amount received by the child upon maturity of the policy. Parents must pay the regular monthly, quarterly or annual premiums for the full term of the policy. Premiums less any fees are capitalised at the interest rate applicable when the policy is taken out. Depending on the product chosen, interest may be increased by participation in the insurance company’s profits.

Despite these many advantages, there are also downsides to this solution. These include the minimum 10-year term in order to qualify for the tax advantages, and the obligation to make premium payments on set dates. Relatively high deductions also apply if the policy is terminated before maturity.

Home savings schemes with tax incentives

In simple terms, a home savings scheme is a savings account that should be used to finance the acquisition of a property in the future. In addition to the guarantee for the capital and return, this solution offers greater flexibility regarding the level and frequency of payments than a life insurance policy. In contrast, the use of the accumulated savings is restricted if you wish to take advantage of the tax incentives.

Since 1 January 2017, the tax incentive on home savings schemes is restricted to personal housing needs, i.e. an investment in your main residence. In contrast, the annual maximum amount that is tax deductible on deposits made for taxpayers aged between 18 and 40 years old at the start of the tax year has been doubled (to EUR 1,344 from EUR 672 previously). Your spouse or civil partner is also eligible for a tax deduction of the same amount, and the same tax advantage is available for every child in the household. Interest income earned each year in a home savings scheme is also exempt from the 10% withholding tax.

At the end of the contract, the building society provides a mortgage at a fixed preferential interest rate for the purchase of a property. The interest rate is set when the contract is concluded.

An investment fund savings plan offers the highest return potential.

Investment fund savings plans are not risk-free

An investment fund savings plan (mostly in the form of a SICAV) offers the highest return potential. It’s also the product that involves the most risk. Savings are invested on financial markets to optimise returns. Anyone opening a savings plan in their own name should check the tax consequences of transferring ownership to their child beforehand. If the plan is opened directly in the child’s name, be aware that, as we mentioned above, the child can dispose of the investments freely as soon as they reach adulthood.

Why give pocket money?

Giving children pocket money doesn’t just teach them how to count, but also transfers other values such as saving for the future, duty, sharing, independence and, above all, responsibility. Giving pocket money is an act of trust, which prepares children or young people, slowly but surely, for life as an adult. Proper money management is an important matter.

It may seem silly to give a child as young as five a small budget to manage, but there is no reason not to. Quite the opposite! Additionally, managing money ensures a proper understanding of basic arithmetic.

The amount of pocket money should be adapted to the child’s age. The money children get should be used to pay for age-appropriate things and activities. It’s generally easier to start with a smaller weekly amount of pocket money, before gradually reducing the frequency and increasing the amount of payments.

For a small child, a piggy bank can be used to teach them how to literally put money aside in a way that is both clear and fun. Some banks in Luxembourg offer savings cards for children under twelve, with which they learn how to pay money into a savings account in their own name.