Are there any ways to invest for children that matures when they're older than 18?

T

tinymouse

Registered User
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I have a young child, and would like to invest for their future and make use of the 3k per annum small gifts exemption. I've seen a few options such as a bare trust and a Child's saving plan. But they all mature at age 18, and give complete control of the money to the child.

I knew a couple of people who received inheritances at age 18, and blew through the money within a couple years, and deeply regretted it. I'd feel a lot more comfortable if they got it at, say age 30, when they've hopefully experienced the world and the workplace a little bit.

Are there any kinds of trust funds or anything, where the money is locked away for a longer time?
 
It doesn't necessarily transfer automatically at 18. Mine is with New Ireland, and when setting up you have the option to strike out the following clause :

" The Trustee(s) are required to give each Beneficiary the option to receive the monies comprising the share of their
entitlement under the Policy when the Beneficiary reaches the age of 18 years onwards."
 
RedOnion said:
It doesn't necessarily transfer automatically at 18. Mine is with New Ireland, and when setting up you have the option to strike out the following clause :

" The Trustee(s) are required to give each Beneficiary the option to receive the monies comprising the share of their
entitlement under the Policy when the Beneficiary reaches the age of 18 years onwards."
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Not that you’re likely to get into a legal battle with a child, but I assumed the 18 year old end point for bare trusts was something in law that you’d have no discretion over?

Also curious if the child gets any post from New Ireland, or would it be easy to hide it from them until you’re happy to reveal it?
 
I think the issue is that once a child reaches 18, s/he could potentially sue the trustees for poor performance.

In other words, the life company is minimising its liability as opposed to any legal restriction on creating a bare trust for an adult.
 
Sarenco said:
I think the issue is that once a child reaches 18, s/he could potentially sue the trustees for poor performance.
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Yes, correct.
Technically, once my children reach 18, I have a form for them to sign which indemnifies me against any future investment losses.

I'm a long way away from that point, so will look into it when I get closer to the time. My broker went through it when I set it up.
 
Following up on this. It seems any investment product for children has both a circa 1.25% annual charge, and an exit tax of 41% every 8 years on the gains.

If I'm looking at a 30 year span of investing, is my thinking right that this would mostly negate the 33% CAT savings compared to if I personally invested and gifted the money myself later? Assuming for the sake of comparison, that I was investing in individual shares and my annual return was exactly the same as the fund.

I'd be paying a 33% CGT on the gains rather than 41. And the returns overall would be larger, as I'm not paying out every 8 years.
And the annual charge would erode away the returns as well.

I'm not very good with the maths for all this. I've no idea how I'd begin to calculate all this. But instinctively it looks like not a great deal.
 
tinymouse said:
Following up on this. It seems any investment product for children has both a circa 1.25% annual charge
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Are you sure about that? An AMC of 1.25% these days is terrible value for money.
tinymouse said:
If I'm looking at a 30 year span of investing, is my thinking right that this would mostly negate the 33% CAT savings compared to if I personally invested and gifted the money myself later? Assuming for the sake of comparison, that I was investing in individual shares and my annual return was exactly the same as the fund.

I'd be paying a 33% CGT on the gains rather than 41. And the returns overall would be larger, as I'm not paying out every 8 years.
And the annual charge would erode away the returns as well.
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Correct - investing directly in shares is much more tax and cost efficient than investing indirectly through the likes of a unit linked fund.
 
tinymouse said:
If I'm looking at a 30 year span of investing, is my thinking right that this would mostly negate the 33% CAT savings compared to if I personally invested and gifted the money myself later?
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There are a lot of scenarios to consider, including whether the children will ever exceed their lifetime threshold for inheritance tax free.

If the children have already reached their lifetime threshold before you gift them the shares, they would get a credit against CAT of the amount of CGT you incurred.

When comparing the 41% exit tax vs 33% CGT rates, remember these are only on the GAIN. CAT is on the entire amount you gift them. So, the longer the investment period, and the higher the assumed investment return, the less beneficial it is to utilise the small gift exemption.
 
The indivative AMC for a regular contribution product with advice is 1.25% to 1.5%. On an execution only basis it's 1%. You either need/want advice or you don't and that dictates the AMC.


Gerard

www.saveandinvest.ie
 
GSheehy said:
The indivative AMC for a regular contribution product with advice is 1.25% to 1.5%. On an execution only basis it's 1%. You either need/want advice or you don't and that dictates the AMC.


Gerard

www.saveandinvest.ie
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Investments for kids tend to be smaller amounts of money I’d have thought?

A PRSA isn’t a bad way to invest for a child longer term. Even with after-tax money.
 
tinymouse said:
Following up on this. It seems any investment product for children has both a circa 1.25% annual charge, and an exit tax of 41% every 8 years on the gains.

If I'm looking at a 30 year span of investing, is my thinking right that this would mostly negate the 33% CAT savings compared to if I personally invested and gifted the money myself later? Assuming for the sake of comparison, that I was investing in individual shares and my annual return was exactly the same as the fund.

I'd be paying a 33% CGT on the gains rather than 41. And the returns overall would be larger, as I'm not paying out every 8 years.
And the annual charge would erode away the returns as well.

I'm not very good with the maths for all this. I've no idea how I'd begin to calculate all this. But instinctively it looks like not a great deal.
Click to expand...
There's a lot to unpack in this post.
  1. Yes, you have to pay the amc and deemed disposal. When you work out the actual cost of 1.25% on €3,000 a year, it's not actually that much. €37.50 in year one (I know it obviously accumulates over time). For that, you are getting the administration of your fund, access to some very good index funds, the taxation done for you and a legal trust set up for you too.
  2. Why are you looking at 30 year of investing for a child? When do you intend to give them the money?
  3. Investing the money yourself and gifting them the money later negates the whole point of the exercise, which is to use the annual exemption of gifting €3,000 a year to a child (€6,000 if from a couple). If you gift them the money in one go, you can gift €3,000 and the rest comes out of their future inheritance. Of course, you can always set up a trust yourself and pay in an annual amount but you will have to pay for someone to set up a legally binding trust for your children. There'll be a lot of€37.50's in the cost of that.
  4. Who says the returns will be larger? You are assuming that you will be able to at least match the market. How will you be able to do that? The S&P 500 has 506 different stock holdings. How can you replicate that on your own? Indexes also have strict criteria on calculating the weightings of companies and which companies qualify to be in their index. How are you going to replicate that? What if one stock is doing really well and you have to take some profit off the table to rebalance. Can you do that? Add in CGT will then be payable. As well as the Income tax, USC and PRSI payable on dividends each year.
The bare trust product with life companies is a handy product for what is relatively small amounts of money going in each year. Once the hassle of the initial paperwork is completed, it is hassle free and runs itself with no work required.

As for the original question, in my experience adults kids don't pay too much attention to these funds. They are aware it is there but show very little interest in it. It's something their parents are doing for them in the future. It tends to be the parents who decide that it's time to cash it in, not the child. There will of course be exceptions but families who do this have money anyway, so their children are not usually wanting for much.


Steven
www.bluewaterfp.ie
 
Hi Steven, Thanks for the detailed response.

Is the 1.25% fee not charged annually on the total amount though, or am I completely misunderstanding it? So the first 3000 euro will actually be charged €37.50 x 30 years = €1125. (Plus a percentage of the gains, so potentially a lot higher).

I picked 30, just for the sake of being a round number. But that's close enough to the time frame I'd be thinking.

That's an interesting observation about the kids not paying attention.But I do remember one friend in school who spent 5 years counting down the days until he got his (in hindsight relatively modest) inheritance, driving everyone mad with envy. But that's probably partly his parents fault for telling him about it and not instilling a good financial mindset about it.

It's highly unlikely (without a massive uptick in my finances!) I'd have exceeded the CAT threshold by the time I would make the gift. So offsetting CGT isn't really relevant in this equation.
 
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