Everyone knows how important saving is, so what better start in life than to have a child's ISA?
After the child trust fund incentive was closed, an ISA for children was launched by the government as a replacement scheme to help parents put money away for their youngsters.
However, investing money can be confusing at times and finding out which child's ISA has the best interest rate or the current child ISA allowance limit can feel a little like wading through treacle.
We answer your FAQs such as can a child get an ISA? and run through all the important facts you'll need to know.
Is a child trust fund the same as a child ISA?
There is much confusion over these two types of savings accounts for children, primarily because the child ISA account was launched as a 'replacement' for the child trust fund.
However, in reality the two have very little in common.
Both are savings accounts intended for children that any member of the family can pay into, but unlike the child trust fund, there is no government contribution to child ISA accounts. The child trust fund was closed to new entrants in 2010 and from that date, the £250 government vouchers issued at birth also ceased.
Existing child trust funds will be allowed to continue but concerns have already been raised about how competitive they will remain given it is a closed market. At the moment, you cannot transfer funds from a child trust fund into a childrens ISA account but with the government wishing to align the two products, this may change in the future.
How to compare child ISA accounts
Just like the adult version, a child ISA comes in different formats: cash, shares or ethical/religious selections.
Cash ISAs are undoubtedly the lowest risk but it's worth acknowledging that they also pay lower returns. This means that, in real terms, the value of your savings may fall when you take inflation into account. This makes it even more important to get the best child's cash ISA currently on the market.
A shares ISA, also known as an investment ISA, is rather more complex but has the potential to offer greater returns in the long run. Just like adult investing ISAs it is essential to pick the type of funds which reflect your attitude to investment; the greater the risk, the bigger return you are likely to reap....but there is also a much greater chance that you will lose money. Other factors to consider when carrying out a child ISA comparison (investment ISA) are the number of funds available and the initial and annual charges which will apply.
When you are opening an ISA for a child you may not be able to decide between the two types of savings, cash and investment. Your child can hold both accounts at the same time, but they are limited to one of each type. Therefore, you may want to open an investment ISA to take advantage of the possible child ISA best rates for the long term but also split your money and invest the other half into a cash ISA to provide some security.
There is a third type of child ISA savings: ethical or religious accounts. Such accounts only allow you to pick funds which invest in ethical, green or Sharia companies; rather than focusing on potential returns, only. An ethical child savings ISA comparison will help you find the best child ISA which also satisfies your own principles.
What else to consider
When you comparing products, there's a good chance you may well be focused on finding the child ISA highest interest rate.
And whilst this is important, there are some other factors you need to bear in mind too.
Firstly, there are very strict rules which govern a child ISA. Any money invested cannot be withdrawn until the child reaches age 18, although they will be handed control of the account at age 16. Therefore ensure you do not pay in any money you can't afford to 'lose' until the child reaches 18.
Secondly, you should be aware that although parents can contribute as much as they want, a child is only permitted to earn £100 per year in interest tax-free. This ceiling does not apply to money contributed by friends or other members of the family.
When you carry out a child ISA comparison, make sure you also check for clauses which prevent you from switching provider or who impose hefty penalties if you do. In some cases you can lose as much as 90 days worth of interest if you choose to switch. You may also have to give up to 45 days notice to do so.
Finally, don't forget to check whether your chosen provider is part of the Financial Services Compensation Scheme (FSCS). This provides protection in case the bank or financial institution collapses and guarantees your money up to a certain limit will be protected. You should not really ever consider investing in a child ISA that is not part of the FSCS.
The rules around the FSCS vary between providers – some cover the full £85,000 for a child ISA whilst others only protect a lesser sum – and the protection is shared between all the accounts held by the same provider. If you think the savings may come close to this limit, make sure you check whether any other bank accounts will be covered under the same umbrella. For example, Halifax are part of a group which includes Bank of Scotland, Aviva, SAGA and Intelligent Finance so the total amount of cover from FSCS (usually £85,000 for adults) would have to include any accounts held with all of these organisations.