Planning for your children’s future: the gift of financial security
With the festive period in full swing and the New Year approaching, now is the perfect time to plan for the future, especially your children’s future.
Younger family members may need all the financial help they can get to meet their future expenses, whether education fees, their first car or a deposit on a home.
The earlier you start saving the better, as your money will have much longer to grow in value.
Setting up a savings account or investment strategy for your children or grandchildren makes more sense than giving them cash they might fritter away in a few days, or this year’s must-have toy or gadget, which is likely to be quickly broken or forgotten.
Finding the right account isn’t child’s play, so it is worth taking time to decide where you want to invest. This is a gift that starts small but carefully nurtured should ultimately grow into something beautiful. Here are some options in the UAE:
Basic savings accounts
Many families like to set up a simple savings account in their child’s name, to teach them prudent financial habits from an early age. First decide what type of account you are looking for and how much risk you are willing to take.
By setting a little aside every month, and topping up the account with family gifts on birthdays and other special occasions, your children can see their savings grow and learn the power of compound interest.
Hopefully this will ingrain good money habits and teach them the value of saving little and often. However, given today’s low interest rates, this may not be the best way of building up a large pot of money for the future.
Ambareen Musa, the founder and chief executive of the financial comparison site Souqalmal.com, says the site contains details of 10 bank accounts specially designed for children.
“Some pay higher interest or profit rates of up to 2 or 3 per cent, beating the returns on many regular savings accounts,” she says, adding that the average rate of interest on children accounts in the UAE is 0.9 per cent, higher than the 0.6 per cent paid on regular savings accounts.
The CBD Mustaqbali Savings Scheme offers the highest rate of 3 per cent on a minimum contribution of Dh250 or US$75 per month. To secure that maximum rate, you have to maintain the account balance for at least five years.
Samer Chehab, the chief operating officer at the comparison site Compareit4me.com, says the major UAE banks offer savings accounts for children in the hope that they gain customers for life.
“The biggest attraction is that your child has their own account and can manage their own money from a young age, leaving them well prepared to handle their own finances in adulthood,” he says.
A parent or court-appointed guardian can open an account on behalf of a minor after showing their passport, residence visa or Emirates ID for both the parent and child, and a proof of address.
Mr Chebab says some banks may demand that only the father opens the account for their child, but others allow either parent to do so.
There are typically no minimum salary requirements for the parent, though the CBD Mustaqbali Saving Scheme sets a minimum salary of Dh5,000. Some accounts demand you maintain a minimum balance. The CBI Saver and FGB Child First Savings Account, for example, require a minimum balance of Dh3,000.
Accounts with perks
Some children’s accounts also come with some unique features and attractive perks such as exclusive debit or prepaid cards, monthly draws or discounted banking services.
“For example, the NBAD First Step Savings Account (available for kids under 14) pays up to 0.12 per cent annual interest, but it makes up for that low rate with benefits such as airport lounge access and a free NBAD MasterCard Platinum Debit Card,” says Mr Chehab.
He names the ADIB Banoon Children’s Savings Account as one of the best children’s savings accounts.
“It really encourages children to immerse themselves in the world of finance. The rates aren’t the highest, starting at 0.31 per cent, but ADIB has placed a lot of importance on making personal finance appealing to children through kid-friendly branding, welcome gifts and a special cartoon character created specifically to teach children about finance.”
Mr Chehab also tips the ADCB Child Saver Account. “It pays interest of 1.75 per cent with no monthly fee or minimum balance. It can also be opened in UAE dirhams or US dollars, so it would be a good option for families with kids who travel a lot to the US.”
The FGB Child First Savings Account, which pays up to 1 per cent, is also one to consider, he adds. Savers get one entry in a monthly prize draw for each Dh5,000 of monthly average balance maintained in the account. They are also entered into a quarterly draw, which pays the winner one year of educational tuition fees.
National Bonds is a Sharia-compliant saving alternative, as parents and guardians can buy bond certificates on behalf of minors, with the chance to win big prizes, Ms Musa says. “Certificates are priced at Dh10 each with a minimum purchase requirement of Dh100.”
She says the profit rate on minor savings bonds for the year 2015 was up to 1.68 per cent. “National Bonds also runs exclusive draws for minors with two monthly prizes of Dh10,000 each,” she says.
However, there is no guarantee you will win any prizes, so you should also consider something with a set interest rate.
National Bonds can be taken out by a parent, either the father, mother or a guardian, in the name of the child, who can assume control of the money from age 21. Last year, the number of minors enrolled in its myPlan regular savings programme almost doubled (99 per cent growth).
Gifford Nakajima, the regional head of wealth development, retail banking and wealth management for Mena at HSBC, says that saving for the future is more important than ever because of the premium now put on education.
HSBC’s Value of Education 2016 report show that almost nine out of 10 parents in the UAE want their children to pursue an undergraduate and a postgraduate degree. “They naturally want the best for their children and hope that a strong education will put them in the best position to lead a prosperous life,” he says.
However, hitting these goals requires long-term financial planning, Mr Nakajima says, and many UAE banks offer tailored savings products to parents.
Mr Chebab tips the ADCB Education Savings Plan, designed specifically at saving for your child’s education. “It works best when you sign up as soon as your child is born – that way you have 17 years to be paying into the account before you send the kid off to college.”
ADCB will give you a guaranteed annual college fee payout, and simply tell you what you need to save each year to achieve it. “The potential returns are really attractive but only if you start saving early,” Mr Chehab says.
A 35-year-old parent who starts saving for their child at birth and pays in the required contribution of $6,414 over 17 years would get a guaranteed payment towards college fees of $25,000 for each of five years.
If they do not start until the child is age seven, they will need to pay in the higher sum of $11,506 a year to get the same guaranteed benefit.
An investment strategy
As investors, children have one major advantage compared to adults – time is on their side. It means parents can afford to take greater investment risks on their behalf, as they have more time to recoup any losses following, say, a stock market crash.
However, as children get older, and planned costs such as university fees edge closer, it may be worth moving your money into less risky investments to preserve it in case of a last-minute crash. Tom Anderson, a private client investment manager at Killik & Co, says that given these long investment horizons and low returns on cash, families should look to invest in stocks and shares through a mutual fund. “These have outperformed both cash and bonds over the longest time periods.”
Investing tax-efficiently for children is simple in the UAE, says Sam Instone, the chief executive at AES International.
“I have three children and save a small amount each quarter into named sub-accounts of mine with an international investment platform,” he says. “I invest the money in low-cost index funds, which tend to outperform their active counterparts. The accounts are completely flexible, the charges are transparent and I get to control when the money is passed to them. In the event of my early death then my will passes these accounts to my children or their legal guardian. I could set up the account in their own name or through a trust if I preferred, but prefer to retain control over when they take charge of the money.”
Mr Instone says that most of the education, retirement and offshore savings plans peddled by retail banks and so-called offshore independent financial advisers in this region are outdated. “These endowment style products or ‘Maximum Investment Plans’ often hide high commissions, carry hefty charges, provide access to poor underlying funds, can be easily misrepresented at the point of sale and are all inherently inflexible. There are now a plethora of substantially more transparent, more flexible and more efficient ways to save and invest for the discerning parent.”
You will also need to consider the long-term effects of inflation, which will erode your returns if you hold cash or fixed-income bonds.
“Equities can continue to shine in an inflationary environment, as they offer an attractive combination of capital growth and income from dividends,” says Mr Andersen. This may become particularly important if we see a revival in inflation, as we may next year, with president-elect Donald Trump looking to launch a reflation blitz to revive the US economy.
Mr Anderson suggests investing in a global coverage of equity markets and tips three mutual funds: Fidelity Global Dividend Fund, Fundsmith Equity or the RIT Capital Partners investment trust. “They all have strong performance, although of course this is no guarantee of future returns.”
As with any stock market-related investment, there is a risk to your capital, as the value can fall in a market correction.
Mr Anderson says the alternative is to buy an exchange traded fund, a low-cost passive fund that will allow you to track global stock markets. “However, the three actively managed ideas suggested above have easily outperformed the average global equity index since they were launched,” he adds.
Securing his son’s education
Cem Sengezer wants his 15-year-old son to get the best education he can afford, and decided the best way to do that was to set up an investment plan on his behalf. He is also keen to ensure that the funds will keep flowing in case anything happens to his income due to illness or early death.
Mr Sengezer, 48, who is originally from Turkey and has lived in Dubai for 11 years, travels extensively for his job as the regional director of an international engineering company. “I travel in parts of rural China and India, which can be dangerous, I am always flying and there is the danger of a crash on local buses,” he says. “If anything happened to me, for example if I was killed or could not work because I was disabled, the savings product will make sure my son’s education is protected.”
One year ago, Mr Sengezer set up a flexible savings plan with HSBC Wealth Management, and made his son, John, the sole beneficiary. “It invests in cash and mutual funds with an insurance element that covers both my life and total permanent disability.”
The father will pay a regular monthly premium for an initial period of nearly five years, at which point his son can take money out of the plan or continue running it. “It was very important for me to have something flexible, because you never know where life will take you next.”
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Updated: December 23, 2016 04:00 AM