Save tax-free for your child's future in Germany

Your child will get an expected sum of 90.243 € at the age of 18; 134.422 € at the age of 22; 193.435 € at the age of 26 and 272.265 € at the age of 30. 

If the amount is too low, increase your contribution to reach the target amount. The exact result will depend on the return on your investment. Keep in mind that any excess amounts don't need to be gifted, or can be reserved and passed on at a later time. In the above, we assume that the tax rate is indeed zero.

Tax and benefit considerations

Before we go into solutions, it is important to be aware of the main tax and benefit considerations in Germany. The first is generally overlooked but can be quite important:

1. If your child has too many assets (over 15.000 €, see Bundesministerium für Bildung und Forschung — BMBF), they won't be eligible for a student stipend when they study, and this is a potentially large benefit: almost 10.000 € per year for up to 5 years. This is especially important if your monthly gross income is below about 4.000–5.000 € when they are studying — higher incomes make your child ineligible.

2. Children, too, can benefit from the standard tax-free threshold, or Grundfreibetrag (12.096 € in 2025). This can be used to reduce or eliminate capital gains taxes or income taxes on distributed savings.

3. Every ten years, you can donate a quite sizable amount to your children free of tax (400.000 € in the case of your children, 200.000 € in the case of your grandchildren).

What type of investment is best for your Kindersparplan?

Forget about the classic bank savings account. It used to be very helpful for children to understand how an account works as a means of transferring and holding money. However, that is no longer the case with Apple Pay and all kinds of easy pay methods. The benefit of a classic bank account as a savings tool is limited as the returns are so low. Even with the recent uplift, this will not result in a good return, as the uplift is temporary, and returns will remain much lower than in stocks. Instead, focus on ETFs.

ETFs are the way to go!

Stock ETFs make the most sense for your children, as the time horizon is quite long: for any of the goals mentioned above, the time horizon is in the range of 18–30 years. This is more than enough to ensure a rate of return on a properly chosen ETF portfolio that is much higher than you get on a savings account. It also allows the child to learn about risk and return!

Which ETFs? Broad-based indices, such as those we offer, are the way to go, and an important lesson to convey.

Our ETF portfolios are well suited to your children. Their investment horizon is very similar to the pension investment horizon. In practice, a good investment will leave a nice cushion and hence is, in part, invested far longer than the 18–30 years when the first main drawdowns take place. In any case, the share of bonds can be increased over time.

Understanding the investment horizon can be an important lesson to convey as well. Over time, when the time of using the funds is coming closer, some or all of the money can be moved gradually from stock ETFs into bond ETFs or a bank account. They will understand it means lower return and lower risk. If they want higher returns, they need to save more and create a risk buffer — a valuable lifelong key lesson in finance!

What makes Pensionfriend's Kids ETF Savings Plan different from the regular Sparplan?

It can save them and you quite a bundle.

We see a lot of recommendations for ETF savings plans due to tax considerations. However, as noted above, this may cost them their student allowance if they study in Germany. So if the children that you aim to support will study at least some time in Germany, then an ETF Sparplan that leads to savings of over 15.000 € may not be a wise idea at all. Basically, most, if not all, savings over 15.000 € would be lost due to ineligibility for student stipends.

Therefore, in this case, we would recommend a Pensionfriend Kids ETF Savings Plan. It has the same low-cost structure and flexibility, and the same investment options and tax treatment as the Private Pension Plan. You own it, and the children are the beneficiaries until you give them it.

As the owner, you can reassign the contract to your children, which would be considered a gift in Germany. In doing so, you, therefore, do need to consider the gift tax consequences. Fortunately, for own children the tax-free limit is a massive 400.000 €, for grandchildren the limit is 200.000 €. For nephews and nieces, the limit is 20.000 €. These limits and taxes apply to any 10-year period so that they can be used repeatedly. For example, gifts at age 2 and age 11 will be added together, but a gift at age 10 and age 21 will not.

Tip: Both parents (say mother and father) and grandparents can provide such gifts.

You should also remember that if you consider the alternative, an ETF account with a broker or bank, you must file an annual gift tax. With the Pensionfriend solution, you only file the gift once (when they are 18 or when you feel they are ready).

Saving for your children's future: How much is needed?

If you aim for a specific outcome, use the following table as a rough guide.

Monthly contribution required for a child aged 1.

How is the payout taxed?

As noted above, the contract can be reassigned (gifted) to your child without triggering the gift tax if it is below the (high) threshold.

You can also avoid capital gains tax to ensure the pay-out is entirely tax-free: if your child has no income, he/she can take out an amount on which the gains are less than the tax-free threshold (about 12.096 €). 

Calculating the amount is a little tricky. Of course, the child can take out 12.096 € every year, but ideally, you have an estimate of the share subject to capital gains. If, for example, the contract is worth 60.000 € and the gains are 30.000 € in principle, only half is subject to capital gains tax so that the kid could take out double the 12.096 €. 

Unfortunately, the capital gains are not based on the averaging gains but on what was precisely bought and sold. It is determined using the so-called FIFO (First In, First Out) method. If you stick to a simple portfolio and regular contributions, this can be easily calculated.

Another benefit: no worries about the kid not being ready for your gift.

With a Pensionfriend Kids ETF Savings Plan, you can choose when you transfer ownership, so you can wait with the gift until you feel the time is ripe. In any case, the kid needs to be 18 years or older. No contract can be reassigned to a child under 18 in any case.

Especially for a serious savings sum, the ability to decide later is helpful. After all, you don't know when the child is ready for such a large gift if you are better at helping your kid with an education or in a different way, and if you want to add further conditions to ensure good use.

In case the child is eligible for a considerable student stipend, you can also delay the ownership so as not to endanger the stipend until later, for example, for the purchase of a home.

The child can also — for example, if the savings grew to an amount higher than what was needed — avoid taking money out and paying taxes by using the assets as collateral for purchasing a house. In that way, the assets can accumulate tax-free and possibly even be eligible for half the tax rate at age 62. In effect, it becomes that retirement nest egg that has served a very useful purpose in life as well.

In contrast, in the case of the typical bank or broker-based ETF savings plan, ownership lies entirely in the hands of the child after the age of 18 and will be out of your control. As discussed above, if the assets are meaningful, it voids the ability to get a student stipend in Germany. Therefore, we do not recommend this for sizable savings such as those intended for higher education.

And what if your income falls away?

With a Private Pension Plan — that we dub Pensionfriend Kids ETF Savings Plan — in your name with a child as a beneficiary, you can always change the beneficiary to yourself.

But if you are concerned about what happens if you or, more generally, any parent passes away, get term life insurance. It is much cheaper than you think, especially when the parents are young and the children need it most.

Even as a grandparent or a dear uncle or aunt, you can contract and de facto donate such insurance by making the child the beneficiary — with the surviving parent being in control of the money while the child is a minor. Payments for such life insurance are exempt from income tax.

Suppose you want to avoid inheritance tax on the life insurance payment (and the gift/inheritance tax-free threshold is exhausted). In that case, if the child is over 18, you can put the life insurance contract in the name of the child and donate the fees, or you can put the contract in the name of the parent and donate the fees, assuming their tax-free limit is not exhausted when they pass away, or their tax rate is lower. 

Click here to read more about private pension plans in Germany in general.

A final benefit that makes the product super attractive

You can use the Kids ETF Savings Plan to pass assets to your children tax-free.
If you make the savings plan dependent on your death, your children pay neither inheritance nor capital gains tax.

So when you consider that your kids are ready to receive ownership (and before you reach the gift tax limit), you pass ownership to your children. If they don't use (all) the assets but let them grow, they eventually have a large sum in such a plan and would have to pay considerable capital gains tax when selling. By making the pay-out contingent on your death, the sum also becomes free of capital gains tax at that moment!

This benefit only applies to private pension plans and not to general ETF accounts.

What are your next steps with the Pensionfriend Kids ETF Savings Plan?

1. Determine the savings target and amount you want to set aside.

2. If the amount is small and more symbolic, a tangible option like an ETF savings plan is presumably the best first step. You can open these online. There are many to choose from, and basically, we suggest picking something you are already familiar with, like your bank.

3. When the amount is more significant, open a Pensionfriend Kids ETF Savings Plan: follow the steps, but keep in mind that some questions are designed for a pension, so do book an appointment with an advisor to discuss and finalize the specifics.

Educate your kids

In any case, it would be a lovely idea to educate your children. In the early years, it was just about the basics: what is money, and what do we have to pay? From the ages of 10 to 14, it can be about how to earn money, and in the teenage years, for example, the difference between stocks and brands. 

Personally, I bought my first stock at the age of 12. You will be the judge when your kid is ready to understand that money can work for you, that stocks allow you to own a bit of the grocery store where you buy your food, etc. In any case, make it fun for you and the child!

And yes, eventually, we will do special kids' money talks with ideas and picture slide sets for you to use. How about money? As soon as the author has grandchildren. ;)

Next steps:

1. Determine the savings target (using the calculator in this article) and the monthly contributions needed.

2. Sign up to Pensionfriend and choose an ETF portfolio investment option.

3. Schedule an appointment with your Pensionfriend advisor to discuss your options and any questions you may have — absolutely non-binding.