When it comes to Christmas presents for your children and grandchildren, you have the option of offering immediate joy by getting them something they want today that they may have grown out of by tomorrow, or getting something that they might not be excited about today, but will be very grateful for when they are older! I am of course talking about a savings account!
It's never too late to start saving for your children but the earlier you start, the more of a difference it can make.
For example, if you gifted £100 each month for a baby from birth, into an account paying 5.50% gross/pa (this is what you can currently earn on a kid’s regular savings account) your child could have almost £16,000 after 10 years – or over £36,400 after 18 years.
Even £20 a month can help. After 10 years this could grow into nearly £3,200, or over £7,200 when they turn 18 (assuming rates remain the same and you start saving for them from birth)
Premium Bonds are very popular for children but smaller holdings in Premium Bonds are less likely to win a prize at all, never mind the big one, although in July 2004, someone with a holding of just £17 won one of the £1m prizes, so you never know!
However, there might be better options for children, especially if you would like to teach them the value of saving – rather than hoping to ‘get rich quick’ with a big win on the Premium Bonds, which is highly unlikely.
Like adult accounts, there is a variety of savings accounts available for children, from easy access accounts to tax free Junior ISAs which cannot be accessed until age 18. So, it’s important to pick the right account to meet your children’s needs.
A junior ISA (JISA) can provide either a variable cash savings interest rate return, or stock market investment return and importantly any return is tax free to both child and parent (if the gift has come from them).
Parents should be aware that once the amount they have gifted to their children starts to grow, there could be a tax liability to watch out for, if the funds are outside a JISA. Children have their own personal allowance, so for the majority there will be no tax to pay on their savings interest. However, parents should be aware that there may be a tax liability to themselves on the interest earned on any money they gift to their children, until they reach the age of 18.
If the total gross interest earned on all cash gifted by each parent is more than £100 per year, then all of it (not just the excess) will be treated as that parent’s interest for tax purposes and therefore they may need to pay tax at their marginal rate - if it takes them above their Personal Allowance and/or Personal Savings Allowance.
If the gross interest earned is less than £100 for each parent’s gift, it is considered so minimal that parents do not need to declare it.
Gifts from any other family members or friends will not be viewed in the same way. Instead, any interest earned will be treated as belonging to the child themselves and therefore can be earned tax free if they are non-taxpayers.
The exception to this rule is on funds deposited into a Junior ISA, Child Trust Fund or NS&I Premium Bonds. Any interest earned on the former two products have a specific exemption and so are simply tax free regardless of where the funds came from.
And prizes from Premium Bonds are not classed as interest, so are also exempt. It’s just as well, as it would be pretty shocking for a parent to have to pay income tax on a £1m prize!
Of course it should be remembered that money in a JISA cannot be accessed until the age of 18, although at this point it could be moved into an adult ISA, including a Lifetime ISA (LISA) if they are still available, which could see those savings earning a 25% bonus!
At the time of writing, the best kids’ easy access account is paying up to 5% AER - the HSBC MySavings Account. This rate is paid on up to £3,000 only – no interest is paid on anything over that.
There are also quite a few regular savings accounts which can be a good place to put money away every month – but these generally shouldn’t be considered for cash that might be needed on a day to day basis, as there will usually be a penalty for early access, or there might be no access allowed at all until maturity.
The best regular savings account is with the Halifax. The Kid’s Monthly Saver Account is currently paying 5.50% AER for 12 months and no withdrawals are allowed within the term. You can save between £10 and £100 per month by standing order. This amount can be changed, but you can’t put more than £100 in each month, even if you have paid less in a previous month.
Finally, the top JISA is currently offering 4.75% with the Nottingham Building Society, however you’d need to open this in a branch!! For those who are not close to a branch, the nest best is with The Family Building Society. This Cash Junior ISA (2) is paying 4.60% and can be opened via branch but also by post.
But just as with adult savings accounts, keep an eye on the rates and switch to make the money you save for them, work as hard as possible.
@savingschampion
Find us on Facebook