Setting money aside for your child is an understandable ambition for any parent, guardian or grandparent, but with so many children’s savings accounts to choose from how do you make sure you pick the best one? Here’s how to make sure you get
With the soaring cost of a university education, huge deposits needed for first time buyers and rocketing travel costs, saving for your child’s future is something that can make a big difference when they reach adulthood.
Banks and building societies know that once a child has an account there is a good chance they will keep it once they become an adult and take out other financial products with them. As such there are hundreds of savings accounts for children available which can make choosing the best child savings account can be tricky.
Here’s what you need to know about the different types of children’s saving accounts and a step by step guide to choosing the best children’s savings account for your little one.
Tax free savings
Like adults, children are entitled to earn a certain amount each year without paying tax. This means that as long as the interest they earn on their savings doesn’t exceed the annual income allowance they’ll receive any interest they earn on their children’s savings account tax free.
However the interest your child earns won’t automatically be tax free just because they are under the age of 18.
To make sure that the interest they earn on their child savings account isn’t taxed you will have to complete an R85 form (pdf) and hand it to your bank of building society.
There is an exception to the no-tax rule; if the interest earned on any money given to a child by his or her parents is greater than £100 in any tax year then all of the interest earned will be taxed at the same income tax rate as is paid by the parent. This is something to be aware of if you’re planning on making a large contribution to your children’s savings.
The rule applies to stop parents from using their child’s tax-free allowance to gain relief on their own money.
Choosing the best savings account for children
The type of child saving account you ultimately choose will be determined by a variety of different factors:
1. Eligible to apply
If you are opening children’s savings plans in your child’s name then you need to check that they are eligible for the account.
Many child savings accounts are limited to children of a certain age. This is usually because older children are able to have greater access to their savings than younger children, where the account signatory is responsible for running the account.
Before comparing all the different family savings accounts make sure to eliminate all the accounts that your cannot open as your child is not eligible for them.
2. Type of account
There are a variety of different types of accounts on the market designed specifically for savings for children ranging from 5 year fixed rate children’s savings bonds to instant access accounts.
Determining the type of account that is best for your child is the first step to finding the best home for their savings.
If you have a lump sum that you want to put away until they reach adulthood then you may want to consider a fixed rate bond. This type of account will lock their money away for a fixed period, usually between 1-5 years, and in return will often pay the best savings rates for children available.
If you want to build up your child’s savings gradually it's worth considering regular saving accounts for children. These are specifically designed to help you save for your child on a regular basis.
Alternatively if you want to be able to withdraw money at short notice or deposit cash as your child receives it from friends and family, you should consider children’s instant access savings accounts as these offer more immediate access to your child’s money.
3. Hunt for the best children's savings accounts interest rates
Once you’ve decided what type of account you want to open you can start to search for the best children’s savings rates.
Use our best buy Children’s Savings Accounts comparison table to compare the children’s savings accounts best rates side by side.
Other types of children’s accounts
Child Trust Funds
Until January 2011 you could open a child trust fund and use it to save for your child’s future.
This type of account was based on investments and designed to encourage parents to save for the long term future of their children – as any money deposited could not be accessed until the child reached 18.
Savings into a Child Trust Fund were also bolstered by government payments at birth and then later when the child reached 7 years old.
However children born on or after 3rd January, 2011 are not eligible for one of these accounts.
For more information read our guide on Child Trust Funds: An Update.
Trying to choose the best children’s savings accounts can be a tricky task, especially when there are so many options.
You need to remember that simply going for the child saving accounts best rates isn't always going to be the best strategy. Instead you'll need to consider other factors such as access, flexibility to save and risk.
However, there is nothing to prevent you from mixing and matching accounts so that you get a combination that fits with your savings strategy. Building your child's savings in several different accounts will also enable you to save for their long term future separately to their shorter term goals.
You should also make a note to undertake a children’s savings accounts review every year to make sure that their savings are still in the best home.