Foresight
September 2, 2020

Savings solutions for your children’s studies

Preparing for the future of your children or grandchildren starts by making sure they can get the best possible education. However, the ever-rising cost of studies is a concern to most parents. Do you want to plan and save for your children’s studies, but are unsure of the best solution to adopt? Is it better to open an account in their name or yours? What is the best time?

The savings account, secure but not very appealing

The traditional savings account (livret) still speaks for itself. While it is both a simple and safe solution, the fall in interest rates in the last few years makes it increasingly less attractive. Of course, banks are a little more generous with minors, offering a range of “junior” plans. However, these slightly preferential rates are not sufficient to offset inflation, to the extent that the return generally remains negative.

In the long term, savings accounts are therefore certainly not the best strategy. When they come of age, children may receive a lower amount which bears no resemblance to the savings effort that you will have made on their behalf. Conversely, a savings account is risk-free, perpetual and generally without entry or exit fees. It also leaves you completely free to decide the amounts that you pay and does not require any regular payments.  

In short, a savings account may still be a good short-term option. For example, if the family plans to pay significant amounts for their teenager as he/she approaches adulthood.

In the child’s name or yours?

This question should not be taken lightly: opening the account in your name of that of your child has very different implications.

An account open in the child’s name, the “junior” type, will offer slightly better returns. However, you won’t be able to decide on the destination of the funds and their use once they come of age. Indeed, your children may use their money as they see fit.

If something bad occurs before they come of age, you can always withdraw the money if it is considered to be “in the child’s interests”.

If, however, you open an account in your name, you won’t be able to enjoy the benefits of “junior” accounts. Whatever happens, you alone will be in charge of deciding what should be done with your savings.

The life insurance policy: good long-term performance

Another solution that enables you to combine the protection of your loved ones while retaining good savings security, a life insurance policy – it can be taken out by the parent, with the child as beneficiary.

There are two types of policy: those with a return allocated in the form of profit-sharing and those that enable you to benefit from stock exchange returns.

A small drawback: it does not have the versatility or flexibility of a simple savings account. The amount and frequency of the premiums are set from the outset: to be paid by month or by year. The guaranteed lump sum at the end of the policy is also decided in advance: the child will receive the amount agreed at a time agreed in advance, for example when they turn 21. This time does not necessarily have to coincide with when they come of age.

In the event of a parent’s death, the insurance company pays the remaining premiums due, in order to guarantee the payment of the agreed lump sum to the child on the due date.

In Luxembourg, this type of solution enables you to enjoy a tax benefit provided that the policy has a minimum term of  10 years, capped at 672 a year multiplied by the number of people in the household (spouse, children, etc.), unless  of course if  any of the spouses  have chosen individual taxation.

In other words, the life insurance policy solution is only really attractive in the long term, if the parents are sufficiently forward-looking. It leaves little room to improvise or change strategy: the penalties or early exit fees of the policy are large enough to act as a deterrent!

Invest rather than save?

More and more parents are considering investment rather than savings to cover the costs of their offspring’s future studies. Mainly for performance-related reasons, as interest rates on savings have continued to fall, to the point of barely covering the inflation rate.

There are of course pros and cons: everything depends on your values, your financial capacity, your investor profile and your appetite for risk, etc. If your income is barely enough to save, don’t forget that all investments usually carry a risk, however small. If your revenues are well in excess of your outgoings, you may be tempted by this adventure.

You can also consider mixing a variety of solutions: why not take out a life insurance policy while making different investments with various degrees of risk at the same time? You will then not put all your eggs in the same basket! You can guarantee a capital base for your children’s studies, while giving yourself the opportunity for greater returns.

The earlier, the better!

In all cases, the ideal situation is to provide for a savings solution as soon as your child is born. The earlier you start to save, the more you can spread your effort over time, the more you will be able to lay claim to high returns, and the more capital you will have when your children begin their studies!

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