The smart way to spend child benefit payments

Next week, families will get an early Christmas present from the State. On December 5th, recipients of the child benefit will receive a once-off double payment for each child, as promised in last month’s budget.

According to Government figures, the double payment will be made for 1.2 million children in Ireland across 650,000 families. The benefit is paid for children under the age of 16 (and for children aged 16 and 17 in full-time education or training) and is not taxable.

The payments were included among a raft of cost-of-living supports announced to ease the problem of inflation on families. The usual €140 payment will be doubled to €280 per child, which will provide an extra boost for families struggling to make ends meet, with the added pressure of Christmas looming.

A family with three children, for example, should receive €840. As twins are paid 1½ times the usual €140 rate and triplets and other multiple births get two times the rate, those families will receive a little extra.

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Given rising rents, higher mortgage rates and the spike in energy costs experienced this year many families will need this cash injection to help get them through the holiday season.

Child benefit is not means tested, so a family earning hundreds of thousands of euros a year, perhaps with a portfolio of property investments, receives the same amount as a family on a low income, living in rented accommodation. For families on higher incomes, there is the potential to put that money to work for the medium or long term.

Financial consultant Paul Merriman acknowledges that “first and foremost” the payment for many will go to the basics like “keeping a roof over their head”.

“But there is also a cohort that receives that €140 payment who can put it towards medium to long-term goals. My preference for clients who set it aside is to invest or save for future education costs like second-level or third-level expenses.”

According to research published this year, the average college student residing away from home needed roughly €14,000 to meet 2023-2024 living costs. That’s more than €1,500 a month that students and their families need to raise.

This is a big jump for parents from the €3,851 a year expenses an average student in second level might set you back, according to the Zurich Cost of Education in Ireland 2023.

This figure increases for parents contemplating taking the private school route at secondary level. Some 27,200 pupils attended private secondary education in the last school year.

Last year, in a wide-ranging survey, The Irish Times found that the majority of private schools in Ireland had bumped up their fees in 2022-2023, with 5-15 per cent increases.

Some schools are seeing year-on-year increases to meet what they say are rising operating costs. Which means that for parents planning to send their children to private schools in the middle to distant future, they may need to add on additional buffers to the current school fees when working out how much they will need to set aside.

Given that some schools were charging in excess of €8,000 for day students in 2023-2024, additional fee increases could put those costs out of reach for some families, without appropriate financial planning.

So what should you do with the €140 per month if you can spare it?

The answer depends on the individual family’s circumstances. How old are the children? What will you use the money for? When will you need to access it? And, most importantly, how much risk can you tolerate with that money?

For Merriman, when putting your money to use through investing “the number one rule is that you have to beat inflation” but this depends on how much time you have.

“If your child is a baby or below five, you should be looking to invest and most likely you are going to get a better return rate in equity markets and shares way more than a deposit account,” he says.

Merriman often advises against investing for periods less than five years as long-term investments are more likely to ride out market volatility and “see the upper side of that return”.

He suggests one option may be to invest the €140 per month for five years then halt payments, which would still leave families with a decent €8,400 sum, which, left sitting in a high volatility fund for 10 years, could provide a substantial sum. But again that’s assuming the market co-operates, which is a risk some families can’t afford to take.

“If the child is young and you have been saving for a good number of years, it makes sense to take a bit of a risk with better returns in the long term but if you might need to spend it in the next few years it might make sense to put it into deposit,” says Jonathan Daly, head of life retail distribution and propositions at Zurich Life Assurance.

“It does make sense to talk to a financial adviser to figure out the best products to guide your level of risk.”

For comparison, the most competitive regular savings accounts on the Irish market from Bank of Ireland, AIB and EBS in terms of rates offer 3 per cent AER. The annual average inflation rate for Ireland in 2022 was 7.8 per cent. Although forecasts expect it to drop to 5.3 for 2023, and probably about half that rate for next year, that still means savings take a hit in spending power. Then there’s also deposit interest retention tax (DIRT) to consider in some cases thanks to recent interest rate rises.

While keeping money in a savings account might seem like the safest option, Daly says it can still carry risk. “Sometimes there can be more of a risk of not doing anything, there’s the risk of not having enough money to pay for costs as they rise and there is the risk money won’t keep pace with inflation,” he says.

“That’s often the biggest risk in the medium to long term.”

Investing child benefit to keep in advance of inflation comes with its own set of issues to consider, and they’re in the fine print. Namely in fees because financial institutions don’t tend to manage and invest money out of the goodness of their own hearts.

Again this is where a broker or financial adviser is best placed to help with your homework on the different types of fees you might be charged.

“If you have a small amount of money, we suggest you try to avoid products that have a fixed fee,” says Daly. For example, putting in a “relatively small amount” of €140 per month or even €100 of the child benefit might see a cheaper fee if it’s an overall percentage than say a fixed monthly cost.

It also pays to keep a close eye on allocations, says Merriman, which is how much of your money is actually being invested and how much is being kept back as a sort of charge.

“The main thing is to avoid allocations, some contracts would have an allocation 97 per cent so that 3 per cent is gone before you even start to invest.”

Lastly, there are tax implications to consider. Any gains made when exiting a fund or on every eighth policy year are most likely subject to a 41 per cent tax, which is something important to consider. However, some specialised child savings products offer families a handy way to reduce tax on inheritance. As long as the total amount stays under the annual gift tax exemption limit of €3,000 from either individual parent, it should not attract tax or reduce the lifetime parent-to-child tax-free threshold of €335,000.

If families can afford to put aside child benefit and want to spend it in a way that aligns with their priorities, they should seek professional financial advice to get an idea of the best options available to them.