How to secure your kid’s financial future

It makes sense to make provisions at an early stage. We explain what you should bear in mind and how a unit-linked policy can benefit you

Article

5 minute read

2022-08-19

One thing is clear: when you make provisions for your child or grandchild, you give them the best possible financial start in life. With the right investments, you can gradually build up a small fortune – a financial buffer that can pay for your child’s education, language travel, their driving licence or even for old-age provision.

What forms of provision are there?

Various forms of investment are suitable for saving: some of them are quite flexible and low-risk – for example, children’s bank accounts, money market accounts or time deposit accounts. On the other hand, ETF savings plans and unit-linked policies offer much better chances of return, which means you can get much more out of them for your child. At the same time, the risk is higher: fluctuations in value are not untypical here, especially with short investment horizons. In the long run, however, the risk is minimised. You can limit possible losses by investing broadly in many thousands of securities with the help of ETF.

Which form of provision makes the most sense?

There is no one-size-fits-all solution here. What makes sense for your kid depends on what your savings goal is as well as on your tolerance for risk and the term of your investment. Do you want to set aside a specific amount of money for your child’s education or first home? Or is it important to you to have the highest possible return on investment?

Age also plays a role: are you saving for a newborn or a teenager? The savings period varies considerably here. Depending on the type of investment, financial products differ in terms of costs, flexibility and risk level. How to find the right plan? Don’t worry, you’re not alone. Simply get support from a professional and let us advise you. Our team of experts will recommend the most suitable products for your individual savings goal.

What are the benefits of long-term provision?

“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” This statement from investment legend Warren Buffet highlights the importance of long-term thinking. Want to provide for your children and grandchildren for more than ten years? Then you will benefit from the growth of the stock markets in the long term. In this case, a children’s custody account or a fund policy might be just the ticket as the risk of suffering a high loss is significantly reduced. According to a study by Deutsches Aktieninstitut, the average return on the DAX between 1995 and 2010 was 7.8 percent – despite the Internet bubble and the global economic crisis.

The compound interest effect is also good for your offspring’s portfolio: if you pay about 200 euros a month into a fund policy, you can build up assets of about 60,000 euros with an average return of six percent per year – that’s until your child comes of age. If your child continues to save 200 euros a month, they can look forward to a lifelong private pension of about 8,500 euros a month when they retire at the age of 67.

How does a unit-linked policy benefit your child?

The unit-linked policy is a savings plan in the guise of an insurance policy; it offers numerous advantages especially for children if you plan for the long term and want to build up assets for your child. It works like an investment deposit: every month you invest a certain amount (your savings rate) flexibly in ETF funds. You can always withdraw or add money. A fund policy has three advantages over a normal custody account savings plan:

1. Protection for providers

In the event of your death, your insurance company will continue to pay your contributions until your child turns 28. This safeguards your child’s provision.

2. Additional modules

You can easily add further useful modules such as supplementary health insurance or income protection. Supplementary health insurance covers costs that are only partially paid or by statutory health insurance – or not at all. In this way, you guarantee the best medical care for your child: from free choice of clinics and physicians and single rooms in the hospital with rooming-in option (allowing parents to stay with their child overnight free of charge) to treatment by a chief physician and health insurance abroad.

Income protection covers, among other things, the case of occupational disability. For children from the age of 10, this module can usually be taken out without a health check. If your child is unable to attend classes for at least half of the time without interruption for six months, the contributions for the savings plan are waived and your insurance will instead pay out the agreed occupational disability pension.

3. Tax advantages

In general, profits from a children’s securities account are not tax-free: 25 per cent withholding tax applies. However, your child is entitled to tax-free allowances such as a saver’s allowance (2022: 801 euros) and basic allowance (2022: 10,347 euros).

With fund policies, however, you do get tax benefits! As long as no money is withdrawn, investment income and portfolio shifts are exempt from tax. Otherwise, the same rules apply as with a securities account. Moreover, in old age, your child’s private lifelong pension is only taxed at the so-called income share: this means that at age 65, your child only has to pay tax on 18 percent of their private pension. On 1,000 euros of pension per month, 81 euros of income tax would then be due at a tax rate of 45 percent, provided there is no other income. With 8,500 euros per month, this would mean only about 688 euros in taxes.

If you have any questions about pension options for children or want to know which insurance offers the best benefits for your needs, we will be happy to advise you – independently and free of charge. How much can you save for your child? Find out now!

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Author: Konstantin