We show you how to help your child get the best financial start in life by maximising the potential of their savings.
Encouraging your children to save early on in their lives will not only give them a good grounding in the basics of managing their ‘finances’, but could help them build a significant pot of money by the time they reach 18 – giving them a head-start on some of the larger expenses of adult life.
We show you how to help your child get started with saving.
What should I look for in a savings account for my child?
Many children’s savings accounts come with incentives upon opening – usually in the form of freebies for your child. These tend to be along the lines of a free calculator or piggy bank but sometimes banks even give away gifts like mp3 players or railcards. However, while the freebies alone are often enticing enough to make opening an account worthwhile you shouldn’t choose an account on this basis alone as in the long run the rate of interest paid on your child’s savings is more important.
That said, if an account with a great giveaway but a poor interest rate requires a low opening balance and places no restrictions on withdrawals it can be worth opening one in order to take advantage of the freebie anyhow. However, you should then choose an account that offers a good return as the main home for your child’s savings.
Children’s savings accounts generally pay interest at a higher rate than adult savings accounts. However, it’s important to remember that not all will offer your child a decent return. This means it’s worth shopping around and comparing all the children’s saving accounts on the market before choosing a home for your child's nest egg.
Are children’s savings taxed?
Children’s savings accounts are not automatically tax-free. Children, like adults, are given a tax-free allowance each year (£7,475 for the 2010/2011 tax year) but if this is exceeded the interest paid on their savings will be taxed in just the same way as an adult’s account. The reason children’s savings accounts are usually tax-exempt is simply because most youngsters don’t earn enough to reach the limit of their tax-free allowance.
You can ensure that interest paid on your child’s savings is not taxed (presuming their income falls below the allowance limit) by filling in an R85 form for each account they have.
Parents are able to save or invest as much money as they like for their child; however, if the interest earned on these savings exceeds £100 a year (that’s £100 interest per parent or step-parent) then tax will be applied at the parent’s rate.
On the other hand, anyone else who deposits money in your child’s savings account other than a parent or step-parent can invest as much as they like without the interest being taxed. This means that if your child has doting grandparents, uncles, aunts, godmothers and so on, they can contribute as much as they like towards your child’s savings - tax-free.
What are my options?
Instant access savings account
An instant access children’s savings account means that you can withdraw your child’s money at any time, without giving the bank or building society notice of your intentions. What’s more, they can usually be opened and maintained with a small minimum balance which makes them idea for child savings.
It’s worth bearing in mind that the interest rate paid on instant access accounts is generally lower than that available on fixed term offerings but this is a trade-off for the added flexibility they provide.
The rate of interest paid on instant access accounts tends to be variable – which means the provider can lower the rate over time – so you will need to keep an eye out and move your child’s savings as and when the account becomes less competitive. You will also need to look out for bonus or introductory rates that elevate the amount of interest paid on your child’s savings for a short period of time but really mask a mediocre account. While it’s fine to take advantage of the added short-term earning potential they offer, you will need to remember to move your child’s money when the bonus comes to an end.
If you are happy to lock your child’s money away for while without needing to access it, a fixed rate account can be an option worth considering.
These offer you security as you know that the interest paid on your child’s savings will be fixed at a certain rate for a pre-specified period. However, although fixed rate accounts generally offer a better – and of course more consistent - return than instant access accounts, you’re unlikely to be able to withdraw your child’s money before the agreed term is up and may also be unable to add to the balance during this time. As such this type of account is more suited to those looking to invest a lump sum as part of a longer term savings 'strategy' for their child.
With a regular savings account you will need to deposit a set amount into your child’s account for pre-specified amount of time - for example £25 a month for 12 months. Penalties may be in place if you don’t meet the monthly deposit, and there may be restrictions on withdrawals. However, children’s regular savings can benefit from very competitive interest rates although there does tend to be a cap on the amount you can save.
Junior ISAs are tax free savings accounts designed to help you save for your child's future.
You can save up to £3,600 for your child in Junior ISAs each tax year (April 6th to April 5th) and have the option to split this between a Junior Cash ISA and a Junior Investment ISA.
While these represent a tax-effiencient way for you to save for your child, you do need to bear in mind that you won't be able to access any money that you save in a Junior ISA until your child turns 18. What's more, they'll then have complete control over the money and the freedom to spend it as they wish.
Read our article: The Junior ISA: Your Questions Answered to find out more.
Child Trust Funds (CTFs)
If your child was born after 1st September, 2002 but before January 2011, you will already have a helping hand from the Government. Children born between these dates will have been eligible for a Child Trust Fund (CTF). The Government deposited £250 into this at your child’s birth.
You, as a parent, can also deposit up to a maximum of £1,200 a year into your child’s CTF - with any interest earned completely tax-free.
A Child Trust Fund is a long-term investment so neither you or your child will be able to withdraw the money until they turn 18 years old.
If your child doesn't have a Child Trust Fund they will be able to open a Junior ISA.
What else should I consider?
The vast majority of children’s savings accounts must be opened and operated by a parent or guardian on behalf of the child until they reach a certain age – usually around 7 years old. After this your child will be able to open an account in his or her name but you will usually need to remain as a signatory on the account they turn 16. At this point the responsibility for the account is generally turned over to them. This does however depend on the exact terms and conditions of the account.
As children’s savings will usually be started when your child is young and built over a number of years, it’s important to stay on top of changes in interest rates as these are likely to fall significantly over time. As such you will need to keep an eye on the rate of interest paid on your child’s savings and move their money if the rate paid becomes less competitive.
It’s also important to keep details of your child’s account in a safe place so that they – and your child’s savings - don’t get lost over time.
Finally, you should always take the time to familiarise yourself with the terms and conditions governing any account you open for your child. For instance you may have to make a minimum deposit every month to be eligible for the ‘headline rate’, or there may be limits on the amount you can withdraw from the account. If you know the ins and outs of your children’s savings account from the outset you’ll reduce the risk of unwelcome surprises down the line and will be able to make sure their nest egg is growing as fast as possible.
