Would you like to give your child or grandchild a good start in life financially? Well with a little financial planning you can, or at least you can provide something towards their college fees!
If you were able to put away €100 per month from the date of the childs birth until they are 18 you would accumulate a fund of €21,600. This is ignoring investment growth but also ignoring inflation. Say you put the money into a savings account paying an annual rate of interest of 3%, and DIRT remains at 25% over the 18 year period the total amount in the savings pot for your child / grandchild would be €26,599.15 net of DIRT.
If at this stage the child then invests this into a PRSA and continues saving for their future free of tax with the same rate of return and this time with no DIRT payable until they reach 60. The total accumulated fund would be €194,420. This ignores again the possibility of inflation and the effects it would have on the real value of money, however it also ignores the possible tax benefits of placing €1,200 into a PRSA from the age of 18 onwards and the lump sum investment at age 18, which in my example would be gifted to the child at age 18. This has not been included in the calculations as given the timescales involved tax relief may not be available. Under current rules a gift of €26,599 would be under the threshold amounts. See the Revenue Commissioners website for more information. If this was the only gift received by the child / grandchild then there should be no tax payable.
I understand that the above is quite a stretch to believe that someone would save for 42 years without fail, but I think it is food for thought.
Other savings amounts of say €150 over 18 years and €200 over 18 years are shown below.
Piggy Bank
Example
€150 per month for 18 years at 3% deposit interest rate (ignoring inflation) would achieve €39,898 (after DIRT).
€200 per month for 18 years at 3% deposit interest rate (ignoring inflation) would achieve €53,198 (after DIRT).
If you would like to explore this further and get some details on how to give your child or grandchild a good financial start to life please contact us at shane@afp.ie or phone at 087-1202405.