As your children and grandchildren head back to school, it's a good time to review how much you've all spent over the holidays, and how you and they can replenish their savings.
The good news is that children’s accounts pay some of the best rates on the market - and starting early could instil in them an excellent savings ethic that will help them to have a far healthier financial future.
For example, the best adult easy access account is paying 1.65% AER, whereas there are children’s easy access accounts that are paying up to 3% AER – so almost double.
There are a couple of reasons that you can find better rates for children; firstly, the best accounts often pay these top rates on smaller balances and secondly because the providers probably find that if they attract children at an early age, they could keep them as a long-term customer.
What accounts are available?
Like adult accounts, there are 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.
As mentioned above, the best kids’ easy access account is paying up to 3% AER - the Santander 1|2|3 Mini Current Account.
It is a tiered account which means that if the balance is less than £1,500 or more than £2,000 a lower rate of interest will apply.
The account pays 1% AER on balances up to £1,000, 2% AER on balances between £1,000 and £1,500 and 3% AER on balances between £1,500 and £2,000. No interest is paid on balances above £2,000.
As this is a current account, when the child reaches the age of 13, they can have a Santander contactless debit card or cash card.
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 3.50% 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.
Junior ISAs (JISA)
The JISA is a tax-free savings account which is opened on behalf of a child by their parent or guardian. There is a maximum amount that can be deposited each tax year and for 2021/22 this allowance is £9,000.
However, a key issue with Junior ISAs is that the child becomes entitled to the funds at age 18, so you need to be comfortable that they will use the funds sensibly.
If you, your friends and family were able to gift a total of £9,000 a year to a child from birth, if the account were to grow at 2.50% p.a., they could be on to receive more than £206,000 when they reach 18. Now that’s a gift worth having! But also a huge responsibility.
Even a gift of £50 a month could make a big difference to their future – providing them with over £13,600 at age 18 assuming the same interest rate.
Is there tax to pay on children’s savings accounts?
Children have their own personal allowance, which means they can earn up to £12,570 (in the current tax year) before they have to pay tax. It’s therefore fair to say that for the majority there will be no tax to pay on their savings interest. However, there could be a tax liability for parents gifting money to their children, until they reach the age of 18.
This even applies to interest on cash gifted by a parent deposited in an adult cash ISA, which can be opened from the age of 16. However, it doesn’t apply to interest earned on cash within a Junior ISA a Child Trust Fund (CTF) or NS&I Premium Bond prizes.
If the total gross interest earned on all cash gifted by each parent (outside the JISA, CTF and Premium Bonds) 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.
Any interest earned on cash gifted by other family or friends will not be viewed in the same way. Instead, it will be treated as belonging to the child themselves and therefore can be earned tax free if they are non-taxpayers.
For the best rates, take a look at our Junior ISA Best Buy table.
What else could you consider?
Of course, cash might not be the only option when saving for children. Alex Shields, a Chartered Financial Planner at The Private Office (TPO) says “Investing into anything other than cash should normally be considered for at least the medium term.
So, if the child is very young and the money is not to be used until they are adult, investing into stocks and shares - in global equities for example - could be appropriate as if the value of the investment falls in the short term, there should be time for it to recover before it is needed.
Conversely, if the funds are likely to be required for education costs in a couple of years' time, cash would likely be more appropriate as you would not want to invest in stocks and shares where the capital is at risk, especially in the short term."
For more ideas about investing for the long term for children, take a look at TPO’s article ‘Investing for your children’.
It's never too late start to start saving for your children and the earlier you start, the more of a difference it can make. But just 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.