National Savings & Investments (NS&I) has recently withdrawn its Children’s Bonds from sale, offering instead just its Junior ISA – a new product which was added to the NS&I stable in August this year.
For those who already hold one of these Children’s Bonds, it’s business as usual however, as if the child is under 16 when their bond matures, they will be able to roll over for a further 5 years. The current issue is paying a tax-free/AER rate of 2%.
While some may be disappointed with this news, there are alternatives that can be found elsewhere, although one of the benefits of the NS&I offering was the fact that any interest earned was tax free.
But while this is useful, children have their own personal allowance, so for the majority there will be no tax to pay on their savings interest anyway.
Cambridge Building Society is currently offering a 3 year fixed rate bond matching the rate offered on the NS&I Children’s Bond – which has a 5 year term, so arguably the Cambridge Bond is a better option? Check out our Children’s Best Buy tables to see if there is anything else of interest or call us on 0800 011 9705.
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.
There are measures in place to stop parents from simply opening savings accounts in their children’s name, in order to earn gross interest for themselves. If the interest earned on any money ‘gifted’ to their children 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 own marginal rate.
This even applies to cash put into an adult cash ISA (adult cash ISAs can be opened from age 16).
However, if the total gross interest earned is less than £100 per annum for any money gifted by each parent, it will be treated as the child’s only, under the ‘de minimis’ rule.
The good news is that this potential tax liability does not apply to interest earned on the Junior ISA, which is one of the main benefits of this product. So, parents can gift up to the annual allowance and any interest earned will be tax free for child and parent year after year – which can really add up.
A Junior ISA is a type of tax-free savings account which is opened by a parent or legal guardian on behalf of a child, with the money in the account belonging to the child, although it cannot be withdrawn until they turn 18. At that point the child has unfettered access to the money, so they can spend it how they like.
Parents, friends and family can all contribute to the Junior ISA, as long as the total amount stays within the annual limit, which is currently £4,128, so it can be a great way of building up funds for the future.
While many people are drawn to NS&I products because of the security they offer, the Financial Service Compensation Scheme (FSCS) is just as effective, as long as the maximum held is less that £85,000 per person, per banking licence.
So, while it’s good to see NS&I offering a Junior ISA, given that it remains a popular go-to place for many savers, the rate on the JISA at 2% tax free/AER, is not the best.
Parents looking for a better return on their child’s savings do not have to look far to get much better rates. The top rate on the market is from Coventry Building Society at 3.25% tax free/AER and other well-known brands such as Nationwide, Halifax and TSB Bank, who are not generally known for offering competitive rates on savings accounts, pay a whole 1% higher than this new offering. Check our JISA best buy table for more information.