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As an expat parent in Germany, you know how important it is to support your child's future. But what’s the best savings plan for your child? Many parents opt to save for their children via a junior savings plan — a savings or investment account specifically designed for children. Such plans may offer a tax-efficient strategy by which parents and other family members can save money for their kids’ education — or events further down the line, like a home purchase.
One solution that stands out among the rest is a unit-linked junior savings plan. These plans differ from simply opening a checking account (Kinderkonto) for your child at the bank, and they offer a variety of benefits that other savings options can't match. Given a child’s long time horizon for investing, it makes sense that these plans incorporate ETFs, mutual funds, and other growth-oriented financial instruments — and potentially complemented with bolt-on insurance options designed to provide additional security for their future.
In this article, we’ll review the basics of unit-linked junior savings plans and why they may be among the better savings options for your expat child.
Contents covered in this article:
What is a junior savings plan?
Many expats who move to Germany struggle to understand the various savings options available for their children.
When we talk about a junior savings plan in Germany, we’re generally referring to a savings or investment account designed with a child’s age and financial situation in mind. The exact type of account — and its mix of savings and investment products — may differ depending on the child’s situation and your unique goals.
Several banks in Germany offer a checking account (Kinderkonto) that parents can open on their child’s behalf. While they’re often free and may be beneficial for tax purposes (children in Germany have their own tax allowance, separate from their parents), these custodial accounts may not offer interest rates on savings that keep pace with inflation.
Another option is a children’s savings plan (Sparplan). These are also offered by banks and other financial institutions, and generally allow a parent or guardian to invest in stocks, ETFs, mutual funds, bonds, and other financial instruments on their child’s behalf. Though you'll stand to benefit from higher returns, these plans do not provide any tax advantages.
A third option is a unit-linked junior savings plan. There are several options available, and many of these options have an investment component that allows you to invest in stocks, ETFs, and other growth-oriented financial instruments. These plans provide an additional benefit of being able to save for your child's future in a highly tax-efficient manner.
Let’s dig in to find out more about the advantages of this option.
What are the advantages of a unit-linked junior savings plan?
If you’re an expat weighing the best way to save for your child, a unit-linked junior savings plan offers a number of interesting advantages:
Tax-free growth during the investment phase. One of the biggest benefits of a unit-linked junior savings plan is that your contributions grow tax-free over the course of the child’s investment period. This means that your child’s savings can grow more efficiently and ultimately provide a greater return on investment.
Tax advantages later in life. Furthermore, should your child decide to use some (or all) of the money to support their retirement later in life, only 50% of the growth will be taxed upon drawdown. Your child will also be able to lend against the value of the asset which can provide additional flexibility (and tax advantages) once they reach a certain age.
Bolt-on insurance benefits. Many junior savings plans come with bolt-on insurance benefits that provide extra security for your child. For example, supplementary health insurance may be included. This can open up access to top physicians and higher levels of dental care, among other perks that may come in handy if your child suffers from an unexpected health issue.
Before setting up a junior savings plan, it’s important to understand your goals and how you wish to financially support your child's future. Each provider will offer a range of various features which should be reviewed before deciding how to best structure your plan.
How to involve your child in planning for their financial future
A unit-linked junior savings plan is a great way to teach your child about the importance of saving money for their future. By involving them in the process and explaining how the plan works, you can help instill good financial habits from an early age. This can give them a head start in their financial planning and set them up for success in the future.
Some junior savings plans may be structured in a way that allows the child to take over the investment decisions when they reach a certain age. This can help your child feel more empowered in deciding their own financial future. To help make the transition more seamless, consider involving your child in planning from the start. Ways to do this include:
Teaching your child basic financial concepts. Even at a young age, children can begin to understand the basic elements of financial well-being, such as saving, spending, and budgeting. So, involve them in the conversations you’re having about money (at an age-appropriate level, of course). This will breed trust and a sense of responsibility when it comes to money management down the line.
Give your child an allowance to teach budgeting. Giving your child a small allowance can empower them to start making their own financial decisions. This will allow them to see the difference between spending and saving part (or all) of their allowance.
Start a savings jar. Depending on your child’s age, you may want to use a savings jar or a similar motivating tool to get them interested. A savings jar can be especially helpful for younger kids, who may struggle to grasp the importance of money they can’t see and may benefit from a more concrete representation.
Model good financial habits. Children learn, in large part, by watching and observing. If you work on developing your own responsible financial habits, you can set a good groundwork for their future financial success. For example, if you don’t have your own investment account (or retirement plan) yet, it may be a good idea to involve your child in the process of opening a new account for yourself.
Give your child a head start with LeX-Wealth
As an expat parent in Germany, a unit-linked junior savings plan can be an excellent solution for saving for your child's future. With tax advantages, flexible features, and bolt-on insurance options, these plans offer a variety of benefits that other savings options can't match. By involving your child in the process, you can also help them learn about the importance of saving and establishing healthy financial habits for their future.
At LeX-Wealth, we specialise in financial and wealth-planning services, from saving for your future to securing the right insurance for your specific needs. Our English-speaking advisors offer continuous support, no matter how diverse your goals are. Contact us today to learn more.
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