As parents, we want to give our children the best possible start in life. And saving money for their future is one of the most important things we can do.
But when we looked into Yongo, AG Insurance's savings product for children, we found some concerning issues. High fees, taxes on each contribution, and disappointing returns mean your child might miss out on thousands of euros by the time they turn 18.
Let's explore how Yongo works and why there might be better ways to secure your child's financial future.
Pros and cons of using Yongo
What is Yongo?
Yongo is a financial product designed by AG Insurance for parents who want to save or invest for a child's future. It provides flexibility, allowing you to deposit funds at your own pace, starting from as little as €10. The product is structured as an insurance which offers limited growth of the savings. For this reason, it is mostly seen as an alternative to a savings account.
How Yongo works
Yongo offer two plans for saving for a child:
Yongo Moon
Yongo Moon is a branch 21 life insurance plan. This means that it comes with a guaranteed yearly interest rate, which is currently 2%. The plan has a fixed duration and it lasts until the child turns 26, with a minimum term of 8 years.
The low returns are the main issue of branch 21 plans like Yongo Moon. The central banks try to maintain an inflation rate of 2%. Coupled with a 2% return, this means that the real return after inflation is zero. During periods of low interest rates, for instance during most of the 2010s, we even saw negative real returns, where inflation was much higher than the guaranteed return of products like Yongo Moon. Your child effectively loses purchasing power every year.
That's where Yongo Star can be a better product.
Yongo Star
Yongo Star is a branch 23 life insurance plan, without guaranteed capital. It invests your money in the stock market through a mix of stocks and bonds. This means that returns vary from year to year, and can be negative. But the expected average long-term return is much higher than Yongo Moon. If your child is young and has many years before they will use the funds from their Yongo plan, it's worthwhile seriously considering a product like Yongo Star rather than Yongo Moon.
However, as we'll see below, the fees and taxes for Yongo Star are very high.
Not just for the parents
What's neat about Yongo is that parents, grandparents, and guardians can contribute towards a child's plan.
How do the fees work?
The fees aren't the easiest to understand. But let's break down each plan.
Yongo Moon
0.2% management fee
It roughly costs 0.2% per year to use the Yongo Moon plan. This is affordable.
2% tax on each contribution
However, here is the kicker. You still have to pay a 2% tax on each contribution. So for every €100 you save for your child, €2 goes to the taxman and only €98 will go towards your child.
Exit fees when selling before your child turns 18
There's a 1% fee if you sell the plan before your child turns 18. This is a consideration to keep in mind.
You have to pay taxes if you cancel your contract
The issue is that Yongo Moon isn't very flexible. You have to pay a 30% withholding tax if you stop within the first 8 years of signing up to the product. What is frustrating is that the 30% isn't calculated on the actual returns of your plan but on a fictional return of 4.75% per year. But over the last years, Yongo Moon's guaranteed returns were much lower and didn't even get close to that. So the effective tax you'll pay is much higher than 30%.
So be careful before you decide to start a Yongo Moon plan for your child as it can become expensive to get out.
Yongo Star
2.11% management fee
The management fee is a lot more for Yongo Star as your child's money will be invested actively. The the time of writing, AG estimate the costs of a Yongo Star plan at 2.11% per year. This is very expensive, considering an ETF costs around 0.20%, or about ten times less.
You have to pay transaction fees
They are estimated up to 0.2% per year.
2% tax on each contribution
Similar to Yongo Moon, you have to pay a 2% tax on each contribution.
Exit fees when selling before your child turns 18
There is a 1% fee if you sell the plan before your child turns 18. This is a consideration to keep in mind.
You don't have to pay taxes if you cancel your contract
There are no withholding taxes to be paid for Yongo Star if you cancel it.
ETFs: a better alternative for your child
Did you know that many parents (around 60%) put money into a savings account for their child? Yet only 10% invest in the stock market, according to Trends. I wish my parents had invested money for me when I was born. Instead, they did as most did. They opened a savings account in which they and other family members deposited money from time to time. I'm very grateful to my parents that they did save for me. By the time I turned 18, I had a sizeable amount that I could use to start my adult life. But it could have been so much more. It's because, over time, savings accounts earn less than investing in the stock market. The bank pays a low interest rate on your savings, as it lends your money in the form of mortgages or other loans. But when you invest, you earn a dividend on the growth of the global economy. The stock market goes up and down, but the long-term average is a return that's much higher. And 18 years is plenty of time for an investment to compound. In fact, between 1900 and 2021, the stock market has returned an average of 6.9% per year.
Suppose your child was born in 2005. And every month, you save €50 for them. By the time they turn 18 in 2024, you will have saved €10,800 for them. Leaving that money in a savings account would have resulted in €11,050, thanks to (a small) interest. But, if you had invested €50 every month in a global ETF, your child would have €28,400 at adulthood. That's more than double. From 2005 to 2024, the ETF returned 5.5% a year on average. A savings account returned 0.13%. Taking into account inflation, the real return was, in fact, negative for a savings account (this is in similar vein to Yongo Moon with the guaranteed return of 2%). So if you want to build a nest egg for your child, a savings account won't do much for your long-term goals.
ETFs (exchange-traded funds) are investment funds. They invest in hundreds, or even thousands, of stocks, bonds, or other types of investments. This diversification is an important benefit of ETFs. But here are several reasons why ETFs are the best long-term investment for most people:
- Best for the long term: Investing in ETFs compounds to high returns. And it beats the active funds sold by your bank or the poor returns offered by Yongo's insurance products.
- Diversification: You’re exposed to thousands of companies in one go through a single fund. And diversification is key to good investing.
- Simplicity: After choosing the right funds, you can relax and watch your investments grow. There's no need to waste time analysing individual stocks.
- Cheap: ETFs are a cheap way to invest. They enjoy economies of scale and have no active management costs.
So if you want to help your child build a nice nest egg for the future, investing in ETFs is a great idea in comparison to an insurance product like Yongo offers. It's a smart way to set them up financially for their adult life. And of course, the earlier you start saving for them, the better!).
How to invest in ETFs for your child
There are two ways to invest in ETFs in Belgium:
- Through a broker, where you manage your own portfolio of ETFs
- Through an app like Curvo, which takes care of the difficulties of investing by yourself
1. Buying ETFs with a broker
Investors trade ETFs on stock exchanges. The most popular stock exchanges are the New York Stock Exchange (NYSE) and Nasdaq. But, in Europe, it's better to buy ETFs on European exchanges. For example, Euronext Amsterdam or XETRA. To access a stock exchange, you have to go through an intermediary called a broker. There are several brokers that Belgians can choose from, each with their pros and cons. Investing through a broker gives you the most flexibility. You have access to any of the thousands of ETFs available in the market. But, it's also the hardest because you're fully responsible for the management of your portfolio. You have to learn how to build the best portfolio for your child, how taxes work, which broker to use, how to select the best ETFs, make the trades every month...
2. Curvo: invest for your child with peace of mind
Curvo is a way to invest for your child while avoiding the complexities of investing through a broker. Over 200 Curvo members use the app to invest for their children:
- The right portfolio for your child: Answer a short questionnaire. Then, you can invest in a portfolio that matches your and your child's goals and time horizon. We then manage the best portfolio for you.
- Invest on auto-pilot: Set up a monthly contribution where money is invested automatically. Adopt the best saving habits for your child without effort!
- Each euro you invest is put to use: With fractional shares, all the money is invested, unlike with a broker. No cash is left on the side.
- No transaction fees: There are no transaction fees every time you buy or sell. Also, the funds in the portfolios aren’t liable for the Belgian transaction tax. This saves you between 0.12% and 1.32% compared to a broker for every purchase or sale!
Find out how Curvo works and makes it easy to invest.
Account in your child's name or in your name
You can open an investment account either in your child's name, or in your own name.
In your child's name
As a parent, you can open an investment account in your child's name. They own the account. But you must manage the investments in your child's best interests. When they turn 18, they will have full control over the funds. Only one broker in Belgium offers children's accounts: Keytrade. Keytrade is convenient to use because it's Belgian, it handles all the taxes and administration for you. You also don't need to declare that you have a foreign account. On the flip side, Keytrade is among the most expensive brokers available in Belgium.
In your own name
If you want to control the investments, you can invest for your child. Just don't transfer the account into their name. This allows you to keep full control and decide when and how to give your child the money you have saved. When opening an investment account in your own name, you have many more brokers to choose from. If you decide to invest with a foreign broker, make sure you read up on the relevant taxes and administration. Learn about the transaction tax, the Reynders tax, and declaring your foreign account. A downside of an investment account in your name concerns inheritance. If you pass before your child gets the funds, they must pay inheritance tax on the investments. In that case, gifting is smarter. The tax on gifts is much lower than the inheritance tax:
- Flanders: 3% for (grand)children
- Brussels: 3% for (grand)children
- Wallonia: 3.3% for (grand)children
The good news is that there are no limits on donations of ETFs and other investments!You can go through a notary to formalise the gift, or do it yourself at your local municipality.
€1,000 of ETFs for every Belgian newborn
At Curvo, we believe in good investing. It's a great tool to improve people's financial lives. And we have this crazy idea: what if the Belgian state would give €1,000 worth of ETFs to every Belgian newborn? The children aren't allowed to touch it. It simply sits in an account and compounds. Under this scheme, every Belgian who turned 18 in 2023 would have €4,000 in their account at the start of adult life. And the state had to contribute only 25%. Beyond the financial boon, each Belgian child would experience first-hand the benefits of compounding. This is an important lesson that will be sure to help them for the rest of their lives!
Our conclusion
When it comes to securing your child's financial future, the choice between Yongo and ETF investing is clear. While Yongo's insurance-based products might seem safe, their high fees and taxes eat into your returns. ETF investing offers a more effective way to grow your child's savings, with lower costs and better long-term performance.
Whether you choose to invest through a broker or use an automated solution like Curvo, the most important thing is to start early. The power of compound interest means that every year you wait is a missed opportunity for your child's financial future.