🔔 All I want for Christmas is a secure financial future

Bamboozled by modern children?  No idea what an Xbox or Nintendo Switch is?  Opening a children’s savings account is not the most exciting present but it teaches a lifelong skill and could provide a much needed financial boost when they reach 18.

A savings account can be a great present for children - it doesn’t need batteries and it won’t break after 5 minutes!

Although many children, especially younger ones, may not be too excited about you opening or contributing to a savings account for their Christmas present, they are likely to be very grateful in the future.

By teaching children about how interest works and then allowing them to spend the money they have saved, you could get them into the savings habit and install a valuable skill for life.

And just a small amount each year could add up to something far more valuable in the future. For example, if you gifted just £100 each year, in an account paying 3.25% gross/pa the child could have almost £1,200 after 10 years – or around £2,500 after 18 years.

Although many kid’s accounts come with some gimmick, from piggy banks to money-off vouchers, helping them to understand the true value of money and the benefit of savings interest, is an important lesson.

The good news is that many kid’s accounts pay more than adult savings accounts. And these rates tend to remain far more stable.

As with adult accounts, some of the best rates available are offered on regular savings accounts.

There’s no tempting gift from Halifax, but there is a cracking interest rate.  Deposit a minimum of £10 per month into its one-year fixed rate Kids Regular Saver and your loved one will get 4.50% fixed for 12 months. However, there is no access until maturity.

For more ad hoc savings and easy access, the Santander 123 Mini Current Account is available for kids aged 11 to 18. It pays 1% AER between £100 and £199, 1.98% gross (2% AER) on balances between £200 and £299 and a really competitive 2.96% gross (3% AER) on balances of £300 to £2,000. Balances below £100 and above £2,000 earn 0.00%. The account runs until their19th birthday, then reverts to an adult’s bank account.

And of course there is the Junior ISA (JISA), although the tax-free temptation of JISAs are a bit of a red herring, as most children can get their interest tax-free AND make withdrawals on their instant access accounts. 

The JISA, on the other hand, cannot be accessed until the child reaches 18, at which point they will have unfettered access to the money and they can choose to do with it what they wish. This could therefore be either viewed as an advantage or a disadvantage.

The main advantage of the JISA over a standard child’s savings account is that parents can contribute without potentially becoming liable to paying tax on the interest earned on the gift to their children.

To clarify, if the gross interest earned is less than £100 for each parent’s gift, it will be treated as the child’s under the de minimis rule. This means that provided the interest earned does not make the child a taxpayer, they will be able to offset this against their personal tax allowance, so it will often be free of tax.

But if the interest is more than £100 for each parent’s gift then it will be treated as that parent’s interest for tax purposes and therefore they may need to pay tax at their marginal rate.

This even applies to cash put into an adult ISA (adult ISAs can be opened from age 16) – but importantly not the JISA.

At an interest rate of around 3% gross, a parent would fall foul of this rule on savings of about £3,300 and as the amount saved increases over time, it could have a significant impact.

With a Junior ISA, only the parent or guardian can open the account but then anyone can contribute up to the maximum total annual allowance, currently this is £4,128 per year but this will rise to £4,260 for the 2018/2019 tax year.

As with most children’s accounts, the rates on Junior ISAs have remained pretty stable since they were introduced, but as the rates on offer vary from provider to provider, it makes sense to shop around for the best JISA for your needs. And it’s also important to keep an eye on the rate going forward, as it may be prudent to transfer at some stage. 18 years is a long time to expect an account to remain the most competitive available.

Winner of our 2018 Best Junior Cash ISA Provider, Coventry Building Society is currently top of our table, paying a variable rate of 3.25% gross/ with its JISA.

So, if you, your friends and family were able to gift £4,000 a year to a child, at a rate of 3.25%, you could give them almost £100,000 when they reach 18. Now that’s a gift worth having!