The financial future of grandchildren is close to the hearts of many grandparents, parents and godparents. Whether for education, a driving license or a career start - a financial cushion can make the path to adulthood easier.
But which saving methods make sense and how can grandparents ensure that their investments bear fruit in the long term? In this article, we look at various ways of saving for grandchildren from birth. We show why wealth accumulation with ETF savings plans can be an attractive option.
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What options do grandparents have to save for their grandchildren?
There are numerous ways to make financial provision for your grandchildren. From traditional savings accounts to gifts of money in call and fixed-term deposit accounts to investments on the capital market - each option has its own advantages and disadvantages. It is important to consider your individual goals and investment horizon in order to choose the right form of savings.
Why do grandparents save for their grandchildren?
Grandparents often want to make a financial contribution to help their grandchildren get off to a good start in life. There are many reasons for this:
- Education and studies: Financial support for school or university fees.
- Driving license and first car: help with mobility and independence for adult grandchildren.
- Own apartment: Contribution to your first own apartment.
- General financial security: A cushion for unforeseen expenses or wishes.
Traditionally, the savings book for children was often used for this purpose. It offers security and promises easy handling, but interest rates are very low nowadays, so the return is hardly sufficient to compensate for inflation.
What are ETFs?
An ETF (Exchange Traded Fund) is an exchange-traded fund that tracks the performance of a specific index such as the MSCI World, DAX or S&P 500. ETFs bundle a large number of securities, such as shares, bonds or commodities, into a single product. As a result, they offer broad diversification that minimizes risk while increasing the potential returns.
ETFs are considered to be particularly transparent, as investors can see at any time which securities are included in the fund. They are also flexible and can be traded like shares during stock exchange opening hours.
One major advantage of ETFs is their low cost. As they are passively managed, there are no high management fees, as is the case with actively managed funds. This makes ETFs an attractive investment option for long-term savings goals, especially for grandparents who want to build up assets for their grandchildren. By making regular payments, for example in the form of a savings plan, investors also benefit from the cost-average effect: fluctuating prices are balanced out by buying more units when prices are low and fewer units when prices are high.
Risk-free with low returns - overnight and fixed-term deposits
Call money and fixed-term deposit accounts are considered safe and simple forms of investment. However, they are not very attractive in times of low interest rates, as the return is usually below the inflation rate. As a result, the money saved loses purchasing power in the long term.
- Call money: Flexible and quick access to the balance, but variable interest rates, which are usually very low. It is suitable for short-term reserves, but is not a solution for long-term savings goals.
- Fixed-term deposit: Offers a fixed interest rate over an agreed term, which increases the predictability of the investment. However, the capital is tied up during this time and the return remains at a low level.
Both forms of saving are ideal for grandparents who attach great importance to security, but hardly any long-term asset growth is achieved.
Higher risk and higher returns - investments on the capital market
Investments on the capital market offer the opportunity to achieve higher returns than traditional forms of saving. However, such investments are associated with increased risk due to market and price fluctuations. In order to trade financial instruments such as ETFs, shares or funds, it is necessary to open a child custody account. This makes it possible to manage the assets in the child's name, but requires the consent of the legal guardian.
Here is an overview of the most common investment options:
- ETF savings plan: Regular payments into exchange-traded funds that track indices such as the MSCI World. It offers broad diversification, manageable costs and a solid basis for long-term wealth accumulation. However, there are market risks, which are generally associated with losses.
- Equities: Direct investment in company shares with the potential for high returns. However, shares are associated with a high level of risk, as they are sometimes subject to strong price fluctuations.
- Active equity funds: Portfolios managed by fund managers that are designed to outperform the market. However, they are very cost-intensive and offer no guarantee of better performance than ETFs.
- Real estate funds: Investments in real estate projects offer stable income, but liquidity is restricted due to the high investment. In addition, maintenance costs are incurred and rent losses may occur.
- Bonds: Fixed-interest securities with regular interest payments. They are considered safe, but involve credit and interest rate risks.
- Robo-advisor: Automated asset management with broadly diversified portfolios. This form of investment is an easy way to get started, but requires a high level of trust in algorithms. Individual advice is not provided.
- ETF pension insurance: This form of investment combines the potential returns of ETFs with the advantages of insurance. The investment does not require a custody account and enables long-term asset accumulation with tax advantages and contractual cost security. Internal reallocations do not have to be taxed.
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How can grandparents best save for their grandchildren?
To save effectively for their grandchildren, grandparents should consider the following aspects:
- Savings rate: The savings rate should be individually adapted to the goals and needs of the grandchild and the financial means of the grandparents. Regular monthly payments are ideal for a steady accumulation of assets. Larger one-off payments can supplement the saved capital and realize the grandchildren's greater wishes.
- Consent of legal guardians: The consent of the parents is required to open a child custody account or account in the child's name. They are responsible for ensuring that the funds are invested in the child's best interests. Alternatively, grandparents can open a custody account in their own name and save for a specific purpose for the grandchild.
The advantages of long-term ETF savings plans
Long-term savings plans offer both advantages and disadvantages, which should be carefully weighed up in order to make an informed decision.
Advantages:
- Compound interest effect: Regular deposits enable considerable growth over time, as returns are reinvested again and again.
- Diversification: By investing in different markets, risks can be spread and opportunities for stable returns increased.
- Flexibility: The savings rate can be adjusted to the grandchild's financial means or needs at any time.
Disadvantages:
- Capital commitment: Capital is tied up for the long term, which limits flexibility in the event of unforeseen expenses.
- Market risks: Price fluctuations can affect investment performance, particularly in the case of short-term requirements.
- Investment strategy: Long-term investments require regular review and adjustment in order to be able to react to market changes
An ETF for children can be a useful component of a long-term savings plan, as it ensures the diversification of capital and brings potentially high returns.
Are ETFs a good investment for grandchildren?
ETFs are an excellent investment for grandchildren. They combine low costs with broad diversification and attractive potential returns. They are particularly suitable for long-term goals such as financial security in adult life. Thanks to their passive management and transparent structure, ETFs offer grandparents a simple, effective and flexible way of saving specifically for their grandchildren's future.
How can you set up an ETF savings plan for your grandchildren?
To set up an ETF savings plan for your grandchildren, you must first open a securities account at a branch of your bank or savings bank or another online broker. This securities account is the basis for being able to invest in ETFs via online banking.
- Select provider: Look for a suitable bank that has ETF savings plans in its range. Look for low fees and a broad selection of ETFs.
- Select ETF: Decide on an ETF that suits your investment objectives.
- Set the monthly savings rate and start date: Determine the amount of the monthly deposits and when the savings plan should start.
- Open a custody account: If the custody account is in the child's name, you need the consent of the legal guardian. Alternatively, you can keep the custody account in your own name and save for a specific purpose for the grandchild.
Securities custody account vs. ETF pension insurance - which is more worthwhile for your grandchildren?
Without question, a securities account offers grandparents a flexible way to build up long-term assets for their grandchildren. It allows investments in different asset classes such as ETFs, shares and funds, which enables broad diversification and individual adaptation of the strategy. The junior custody account is particularly suitable for families who want to familiarize their offspring with the basics of the financial world at an early age.
ETF pension insurance, on the other hand, combines the potential returns of an ETF with the advantages of traditional pension insurance. It is a tax-privileged, plannable investment and offers a high degree of legal certainty. As it does not require a separate custody account, it is easy to manage. It also provides long-term cost security and offers tax advantages, particularly when it comes to payouts. Both models have their advantages and should be weighed up on the basis of individual savings goals.
The costs at a glance
The costs for a securities account and an ETF pension insurance policy differ significantly. Here is a comparative example:
Example of a custody account (18-year term, € 100 per month):
- Order fees: approx. 324 €
- Spread costs: approx. 150 €
- Advance lump sum: approx. 1,200 €
- Transaction and hidden costs: approx. 200 €
- Custody account management costs: approx. 1,900 €
- Total costs: approx. 3,800 €
Example calculation ETF pension insurance (18-year term, € 100 per month):
- Acquisition costs: approx. 1,800 €
- Administrative costs: approx. € 1,400
- Costs for capital investment: approx. 3,200 €
- Total costs: approx. 6,400 €
The costs for a custody account are lower in the early stages, as they involve lower acquisition and administration costs. In the long term over ten years or more, however, the tax advantages and cost certainty of an ETF pension insurance policy are clearly noticeable.
Taxation
The tax framework conditions differ significantly. In the case of a custody account, every sale of securities is taxed at a rate of 25% withholding tax, also known as capital gains tax. This tax also applies to all income such as dividends or price gains and significantly reduces the net return. This means that only 750 euros remain from a return of 1,000 euros.
In contrast, ETF pension insurance offers considerable advantages: Internal reallocations remain tax-free, and the payout is also made without levies, provided the child has no income of their own. These tax differences are particularly noticeable in the case of long-term investments and can have a significant positive impact on returns.
Legal certainty, transparency and cost control
A securities account comes with a high level of transparency regarding investment performance and the costs incurred. However, parents lose legal control over the capital as soon as the child comes of age. From this point onwards, the child can dispose of the assets independently, which is not always in line with the long-term goals of parents and grandparents.
ETF pension insurance, on the other hand, not only offers a high level of legal security, but also clear transparency with regard to the development of returns. Parents retain full control over the capital and can decide for themselves when and how payouts are made. The insurance also ensures long-term stable, contractually fixed costs, which makes planning easier. This combination of security, transparency and flexibility makes it an attractive alternative.
What do our customers say?
- Maria, 67: "With ETF pension insurance, I have made flexible and secure provisions for my grandson. I can pay in regularly and know that the money is well invested. I particularly like the fact that my parents retain control over the capital and can plan the payouts in such a way that my grandson receives targeted support later on - be it for his education, his driving license or his first home."
- Thomas, 72: "The tax exemption and long-term predictability convinced me. With a custody account, I would have been worried about the tax burden, especially when switching investments. With ETF pension insurance, I have no hidden surprises to worry about and can achieve my savings goal without any detours. The stability and the tax advantage make me feel that I have made the best decision for my grandson's future."
- Claudia, 65: "I appreciate the security of knowing that the capital is available for my grandchild's education. It was important to me that the money was not spent prematurely, but could really be used for the big, important phases of life. ETF pension insurance offers precisely this security and the option of reacting flexibly to changes. That gives me the good feeling of having done everything right."
Conclusion
An ETF savings plan is an excellent way to build up long-term assets for children or grandchildren. With low costs and attractive potential returns, it is particularly suitable for grandparents who want to save regularly.
However, ETF pension insurance is generally the better choice, as it combines financial security with tax advantages and long-term planning. It makes it possible to react flexibly to life circumstances and at the same time specifically secure the future of grandchildren.
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Ogün
December 02, 2024
We feel that we are in good hands with Oskar 🙂 He explained everything to us in detail and took the time to answer all our questions. Top advice! I am happy to recommend him!
