x Abu Dhabi, UAEMonday 22 January 2018

Best way to hatch a nest egg for your growing child

Briton Richard McFarlin, a Dubai resident, was keen to find the right savings plan for his three-year-old son, Hiro.

Richard McFarlin has set up an offshore trust for his son, Hiro, 3. With them is Hiro's mother, Lalita Saiwanitcharoen. Razan Alzayani / The National
Richard McFarlin has set up an offshore trust for his son, Hiro, 3. With them is Hiro's mother, Lalita Saiwanitcharoen. Razan Alzayani / The National

Richard McFarlin, a Briton, was keen to find the right savings plan for his three-year-old son, Hiro. But because he is a United Kingdom non-resident he could not take advantage of tax-efficient children's savings plans that exist in his home country.

It left the Dubai resident with the problem of figuring out how best to save money for his child's future.

"My parents did not make a savings plan for me. However, I was brought up to appreciate the value of money and pensions, and ended up starting my pension as soon as I left school. I wanted Hiro to have the same start in life and therefore elected to do a private fund," says Mr McFarlin, 43, who lives in Dubai Marina. "Also, based on the bad press that the UK pensions environment is now receiving, I felt that we should consider starting a savings account as early as possible."

Mr McFarlin saves Dh1,250 each month, topped up with Dh11,000 once or twice a year into a Friends Provident fund recommended by his financial adviser at Abacus Financial Consultants. Hiro's private account is in Mr McFarlin's name with Hiro as full beneficiary in the event of Mr McFarlin's death.

"I wanted the account to be clearly separate for Hiro. I have access to a number of saving funds through my employer but it is not possible to define a single stream named for my son, which is what I wanted in this instance, with a maturity cycle as he became an adult," says Mr McFarlin, who works in technology strategy for Emirates and has lived in the UAE for nine years. "I also wanted the flexibility to move the savings into different funds easily."

Mr McFarlin's situation is typical of many expats: he wants to give his son a financial start in life but being ineligible for schemes in the UK such as child trust funds (CTFs) or Junior Individual Saving Accounts (ISAs) means there is no easy, off-the-shelf solution.

Junior ISAs, introduced in the UK in November 2011, allow parents to save up to £3,720 (Dh20,911) a year for a child with the interest paid tax-free. Their predecessors were CTFs.

While Mr McFarlin had to turn his back on traditional British savings options for his son, expats of other nationalities often have to do the same, which means they turn their attention back to UAE options.

According to the experts, however, saving within the UAE is not always the answer. There are limited savings options for children here and despite being a tax-free environment, financial advisers recommend expats save or invest offshore.

"The benefit of saving your money offshore is that any growth on the investment is not taxed. If you saved the money in the UK, for example, you will be taxed on the interest if held in a deposit account," says Natalie Storey, a financial consultant for Acuma.

Another advantage of offshore banking is that your money stays in one location wherever you live or may move to, meaning you can easily access and transfer funds from around the world.

Richard Taylor, a chartered financial planner at the Professional Investment Consultants in Dubai, says he would not recommend saving anything onshore in the UAE.

"There are, however, lots of savings accounts and bank accounts on the Isle of Man and the Channel Islands offering tax-free growth, wider and better options in terms of investments of fixed-term accounts and more security," Mr Taylor says.

If you are saving for the long term, finding an account to beat inflation will be tricky. For this reason, some parents may want to invest in the stock market for their children.

Mr McFarlin's financial adviser, Rupert Connor at Abacus Financial Consultants, says parents can either invest directly into funds or save into a regular payment savings plan.

Investing directly into funds is simple and can be done through a fund manager or through a fund supermarket or discount broker.

"The advantage of either approach is that it is relatively inexpensive, as you don't have to pay for any advice. The disadvantage is that nobody is going to give you any advice," says Mr Connor. "This is fine if you have the time and willingness to do the research yourself. If you do not have the time to do so, then it is a less attractive option."

Alternatively, there are regular payment savings plans, normally provided by life insurance companies in places such as the Isle of Man or the Channel Islands.

"They allow you to save x amount a month for a specific term with your monthly payments being invested across a number of funds from a set menu," explains Mr Connor. "These structures can be tax efficient as they allow you to switch between funds without incurring an immediate tax liability."

Once you have decided how to save or invest for your children, another issue is whose name to put the investment in.

Putting it in your name and giving the money to your children later has pros and cons.

On the plus side, it's simple and you will have full control over the account and can look after the investment.

"You can take the policy out in your own name and, if you wish to do so, a trust can be set up with your child as the beneficiary," says Ms Storey. "In the worst-case scenario, you can use the money for yourself and have the flexibility of knowing you can use the money."

If you don't want to run the risk of dipping into your child's nest egg, putting the account in the child's name means he or she will have control of it upon reaching a certain age. However, this could create issues if the child has gone off the rails or simply has different ideas on how the money should be spent.

Mr Taylor says it is very easy for parents to save offshore for their children as long as they are committing a minimum of about Dh1,700 a month. Instead, he says the biggest problem expats have when saving for their children is self-motivation: "There are no laws that make it difficult."

For expats who have made the commitment, their child will benefit down the line.

Mr McFarlin adds: "I wanted the money as a nest egg, so that he has a choice when he wants to spend his money, either on education, a home or something else."