The banks have been playing Scrooge when it comes to easy access savings accounts in the past two years, with interest rates cut by more than a third since 2013, but children’s accounts have fared far better, with an average loss of just 6% of interest paid over the same period.
Although this means children’s accounts are far from the goose that laid the golden egg, they have remained fairly unscathed with competitive rates on offer, so parents considering opening a children’s account for Christmas money can rest assured it is still a good option.
Back in 2013, the average rate for the top five children’s easy access accounts was 2.67%, while adults would receive an average of 2.25% on their equivalent accounts.
Fast forward to today and children would see an average rate of 2.52%, while adults have seen a much more significant fall to 1.44%, over 1% less than the best buy children’s account average. So the average children’s savings account would have lost just under 6% of its interest since 2013, with adults losing a massive 36% of their savings interest over the same period.
Recent years have seen a huge change in the savings landscape with rates falling to low levels, especially following the introduction of the Funding for Lending Scheme back in 2012, which was the catalyst for record falls in savings rates.
It’s encouraging however that children’s savings accounts have remained relatively unscathed in the downturn as getting into the savings habit at a young age is the perfect start to a successful financial future and understanding the value of money.
The FCA’s Cash Market Study found that at the end of 2013 there were around 7m children’s savings accounts in operation worth a total of approximately £8 billion, an average of around £1,000 per account.
Compare that with the overall number of cash savings accounts (excluding children’s savings) which collectively had deposits of £695 billion as at the end of December 2013. Easy access accounts had £354 billion on deposit, so by cutting rates by 36% from 2.25% to 1.44% in two years, banks would be saving around £2.86 billion a year collectively in interest rates on these accounts alone*.
By cutting children’s accounts by the equivalent amount, they would only collectively be saving £76.8m** and the banks would certainly seem very Scrooge-like in the process – after all, who really wants to take money away from children?
However, if your children are being given money as well as presents this year, now is a good time to start a children’s savings account and if you can add to it throughout the year, with parents and grandparents chipping in, the amount you could save for your child up to the age of 18 is impressive.
Putting £100 a month into the typical Children’s’ Savings Account for 18 years at 2.52% interest would give you a lump sum of £27,279. Compare that to the same regular savings for an adult, who at 1.44% for the same 18 years would have £24,649 – a difference of £2,630.
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 age 18. This even applies to cash put into an adult ISA (adult ISAs can be opened from age 16). However, 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 rules. This means that provided the interest earned does not make the child a tax payer, they will be able to offset this against their personal tax allowance, so it will often be free of tax. 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.
Grandparents however are not subject to the same rule and can freely give money to their grandchildren for their future, and it can even help to reduce their inheritance tax liability if their wealth is sufficient to be concerned about this.
*This is based on £354 billion of savings with rates falling from 2.25% to 1.44% and the amount that would be saved over one year with this fall.
**This is based on £8 billion of savings with rates falling from 2.67% to 1.71% - the amount that they would have fallen, to given a 36% fall like the other easy access accounts - and the amount that would be saved over one year.
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