Saving for the grandchildren: the opportunities, the snags

Saving for your grandchildren is both fun and useful. But it is something to think about carefully. Will it be saving? Investing? Do it yourself or hire an expert? Can you insure the saved capital? Who is actually entitled to the money in case of unforeseen complications? Expert savings tips from the financial advisor. Putting something aside for the grandchildren is not only fun, it is also useful. Just think of the high costs of a study. Or you can surprise your grandchild with a welcome extra when he or she starts living independently. A nice feeling when you contribute. But how does that work? Jos Wagemakers, financial advisor at RVS: ‘This can be done in several ways. You can open a savings account in your grandchild’s name. For example, you could also automatically transfer amounts to an investment account via that savings account. Or you opt for a capital insurance policy, with a fixed term and a fixed amount of deposits. Each way has its pros and cons. If you want to continue to have access to the money yourself, a savings account is preferable. Even those who want the greatest possible certainty about their final capital, or who really do not want to invest, are best off with a savings account. You will then have a fixed interest credit every year. The interest rate varies of course, but your capital cannot be reduced. With an insurance policy, saving is only possible as part of a mix. For example, you can choose from different investment funds, with an investment risk ranging from small to large. Or you create a mix of shares, bonds, real estate and/or savings. A capital insurance policy that involves investing entails more risk, but also the chance of a higher return than you achieve with savings. Moreover, nowadays you can opt for a guaranteed final capital. Then, for example, your grandchild will always receive at least 20,000, regardless of the investment result. What also differs from an insurance policy to a savings account is that costs are charged and withdrawing during the period entails additional costs. In any case, saving through a savings account is the most popular among grandparents. But a combination of an insurance policy and a savings account is of course also possible.’

‘I would only save for my grandchildren if necessary’

Eefje (62): ‘I have never saved specifically for my children, only had a buffer for emergencies. Traditionally I have been based on the idea: I prefer to let them do it themselves and learn from it. I don’t save for my grandchildren either, although they do of course get the necessary presents. I just think they are well off enough, and would rather give a little more to children in developing countries. But if their parents had not had a considerably higher income than me, I would definitely have saved for my grandchildren. A rather wealthy friend of mine has a single daughter with a child and enjoys saving for her grandchild. I always think: if you like it and can afford it, you should do it. Although I think there may be disadvantages. For example, if a kind of competition arises between grandparents: who does the most for the grandchildren? I have experienced that in my environment. Very annoying to see. Moreover, sometimes a lot of money is put away. If you remove every financial obstacle in advance, children will learn less well about the value of money. Of course you can’t say anything general: my daughters were raised the same, but one finds saving much more important than the other.’

The financial advisor

Jos Wagemakers: ‘If you only want or can save a limited amount for the grandchildren, you can simply open a savings account and put something away regularly. However, if you are serious about wealth creation, I recommend consulting a financial advisor. In my consultancy practice, I often sit down with grandparents and parents to map out what the savings goals are and what the desired final capital is. This is how we arrive at a financial plan. Savings goals can also be combined. The parents may start with a capital plan for a home for their child, and the grandparents open a savings account for studies or as a nest egg. In any case, I recommend starting as early as possible. First, you have the interest-on-interest effect over the years, so your capital grows faster. Moreover, you will then make maximum use of your tax exemption. You may periodically donate a certain amount per grandchild tax-free. If you exceed this limit, the exemption will expire and the grandchild will owe inheritance tax. And there is no such thing as a catch-up exemption. So if you later donate a large amount in one go, the grandchildren will pay a lot of inheritance tax. Of course you want to prevent that.’

Saving for the grandchildren: the official side of things

A bit of ‘savings theory’: when grandparents open a savings account for the grandchildren, they are officially called ‘the contractors’. The parents are responsible for the bill, because the grandchild is not (yet) legally competent. They must therefore also give permission for it to be opened. Officially, as grandparents you continue to have access to the money – so the grandchild does not, and neither do the parents. Only when your grandchild is eighteen and therefore of age will he or she in principle have access to the amount. Unless of course other agreements have been made. Speaking of agreements, Jos Wagemakers’ advice: ‘Record agreements in a will to prevent unexpected situations. Suppose that the grandparents unexpectedly die. If it is not stated that the savings balance is for the grandchildren, it can be included in the estate. An intake interview with the notary is often free. Then you can discuss whether a notarial deed is useful. Of course you pay for that deed, but with it you buy security.’

Does saving actually yield anything?

Anyone who thinks saving has little return will probably just have to be patient. Savings interest rates are currently at a historically low level and experience shows that interest rates may rise sharply again in due course…