New savings options put children first

A variety of policies are aimed at parents hoping to focus more on long-term needs to give their children a financial headstart, writes Laura Slattery.

Children can be expensive, which is why most parents see their monthly child benefit payments swallowed up by immediate concerns such as nappies, new shoes and people who are willing to babysit on a Saturday night.

But for parents who can afford to put the payment aside, there is a variety of regular savings products available from financial institutions, which are now forming an orderly queue in pursuit of the proceeds of over 1.1 million Special Savings Incentive Accounts (SSIAs).

Banks and insurance companies are imploring their customers to keep up the savings habit even when they no longer have the SSIA to feed, and long-term nest-egg building on behalf of children and their future education, housing and other needs is just one of their suggestions.

Insurance and investment company Eagle Star has introduced a new savings plan, the Child's Savings Plus, which it claims will help people give their children a financial headstart.

Under the policy, regular monthly premiums are invested in Eagle Star's Matrix range of investment funds, which are linked to the equity markets. This means, like equity-linked SSIAs, the value of the policy can go up or down. As markets historically fluctuate over short periods but rise over time, this makes the product more suitable for savers with long-term goals, such as how to pay for their newborn's third-level education.

From April, child benefit for the first and second child in a family increases to around €150 a month. If this amount is invested in the Child's Savings Plus every month for 18 years and the projected investment growth on the Eagle Star fund is assumed to be 6 per cent per annum, then the fund will grow to €43,660 after exit tax and charges. The minimum monthly premium is €50 and lump sum amounts can be added at any time.

Eagle Star says its product will be of particular interest to parents, grandparents and godparents.The policy can be legally assigned to the child, which will mean that any contributions will count as gifts.

Provided the contributor stays within the annual gift tax exemption limit of €3,000 from any individual and €6,000 from a married couple, the child will not incur any gift tax when they go to encash their lump sum.

A close cousin to Eagle Star's savings policy is Hibernian's Spectrum Saver, which it has promoted in the past as a long-term savings vehicle for children's education costs.

The minimum monthly premium here is €75, and, like the Eagle Star policy, there is no set term, but medium- to long-term saving is recommended.

The Eagle Star and Hibernian products have very different charging structures. At Eagle Star, only 95 per cent of the contributions actually goes into the fund. There is then a 1.25 per cent annual management charge and a €3 per month policy fee.

On the Hibernian product, 100 per cent of the contributions is invested, but the annual management charge is higher at 2 per cent. As well as a €1.50 per month policy fee, there are early encashment charges of 5 per cent of the fund in the first three years, 3 per cent in the fourth year and 1 per cent in the fifth year.

According to Hibernian, a €150 per month contribution will grow to a net value of €43,021 after 18 years, based on assumed investment growth of 6 per cent per annum. The effect of the Eagle Star and Hibernian charges on the policy value are very similar, but Eagle Star is slightly cheaper.

Traditionally, the post office has been the home of choice for adults trying to promote the merits of saving to children. Savings certificates, which require a minimum investment of just €50, have a fixed term of five years and six months, while savings bonds last for three years.

The interest paid is 16 per cent over the full term for the certificates - an average annual rate of 2.74 per cent - and 8 per cent for the bonds, or an average annual rate of 2.6 per cent.

There is an also an instalment savings scheme where investors save a fixed monthly amount of €25-€500 for 12 months. The resulting lump sum is then invested for five years and attracts a guaranteed rate of return of 15 per cent, or an average annual rate of return of 2.57 per cent over the six-year lifetime of the product.

An Post products have the advantage of being State-guaranteed and free of Deposit Interest Retention Tax (Dirt), and unlike the Eagle Star and Hibernian products, there will be no need to worry about investment markets plunging, taking the value of the policy down with them.

But competition in the regular savings market has increased of late, with Bank of Scotland Ireland (BoSI), AIB and RaboDirect offering the best annual interest rates. Bank of Scotland Ireland's Monthly Saver account boasts a variable interest rate of 4 per cent and is open to anyone wishing to put aside €10-€750 every month. The maximum amount that can be invested in the account is €50,000 and the maximum initial investment is €10,000.

The 4 per cent is based on the European Central Bank (ECB) interest rate, which is currently 2.5 per cent. The bank promises that the rate will stay at 1.5 percentage points above the ECB rate until January 2008.

Unlike AIB and RaboDirect regular savings products, the BoSI account is operated through branches and by telephone or online.

The BoSI account is, however, not as flexible as some of the accounts with lower interest rates. The amount saved each month can only be changed once a year. If more than two withdrawals are made in a year or monthly payments cease, the interest rate will revert to 2 per cent.

AIB's online savings account, which requires a minimum contribution of €20 a month, has an interest rate of 3.5 per cent and is structured so that disciplined savers receive bonuses of 10-15 per cent of the interest earned. One major disincentive is that customers have to have a current account at the bank and will therefore be charged transaction and service fees that they wouldn't be charged at other banks.

RaboDirect's account pays a lower rate of interest at 3.35 per cent, but has the advantage of being fully flexible. With just a €1 minimum deposit, it can be used as a home for regular savings or as a lump sum deposit account.

Whether parents decide on a safe, accessible savings account with no exposure to equity markets or a long-term investment policy with the possibility of higher returns will depend on what kind of risks they are willing to take, when they are likely to need the money and if they have other pots of money set aside for both expected money-eating family events and unexpected emergencies.

With SSIAs starting to mature from May 31st, quite a bit of surplus cash is soon to be up for grabs.

So far, Bank of Ireland is the only financial institution to launch a product where it undertakes to pay an SSIA-style 25 per cent bonus on savings in limited circumstances.

But the next few months are likely to see more product launches, gimmicks and pleas by financial institutions to keep on saving.