What lockdown has taught us is that having a bit of a cash buffer is really important, so if our children and grandchildren can get started early, then that could be really good for their future financial health.
Although we’ve seen some best buy savings rate rises recently, there is no getting away from the fact that savings rates remain at desperately low levels. And with inflation more than doubling in the year to April 2021 to 1.50%, from 0.70% in March, there are simply no adult savings accounts available that are paying an interest rate that can keep up with the cost of living.
But there is one area of the savings market that has been more resilient – children’s accounts. Many children’s accounts are still inflation busting – so it’s a great time to set them on a path to a healthier financial future.
Initially, parents can save on their child’s behalf and then hopefully encourage them to save at least some of their pocket money when they are old enough, so that they understand the value of saving up some personal savings for something special.
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.
This even applies to interest on cash gifted by a parent deposited in an adult ISA in the child’s name. Adult cash ISAs can be opened from the age of 16, although not all providers will accept under 18s unfortunately. So, make sure you check before trying to apply to avoid disappointment.
If the total gross interest earned on all cash gifted by each parent (outside the JISA) 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.
Just as with adult savings accounts, there are a range of different types of children’s savings accounts available to suit most needs.
So, bearing all this is mind, what are the best children’s accounts available – and which are the right type of accounts to choose?
Top three Children’ Easy Access accounts
Easy Access accounts will allow the child to get hold of their money easily and quickly when they want to buy something - so could be a great option for older children who have built up a lump sum of money from birthdays and Christmas gifts etc.
As you can have immediate access to the money, the rates on offer are often lower that other types of account, but if you choose the best rates on offer, in comparison to adult easy access accounts, the rates available are extremely competitive. But if the rates do change, as an easy access account, the money can be moved elsewhere without the need to give notice.
Santander 1|2|3 Mini Current Account - 1% to 3% AER
This account is paying one of the best rates on the market for children with £1,000 to £1,500 lump sums. It is a tiered account which means that if the balance is less than £1,000 or more than £1,500 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.
HSBC’s MySavings Account - 2.50% AER
For children with either less than £1,000 or between £1,500 and £3,000, this account might be more appropriate. If the child has more than £1,500 they could use both the Santander account (for the first £1,500) and the HSBC account for the extra (up to a further £3,000) - in order to earn the best rates.
In a similar way to the Santander account, at age 11, a MyAccount is opened for the child, providing an HSBC Visa Debit Card.
NS&I Premium Bonds
Now, we all know that NS&I has fallen out of favour with many of us, however, Premium Bonds are still a firm favorite with new and existing savers. Unlike a normal savings account, Premium Bonds do not pay any interest – instead each month there is a prize draw and each bond holder has a change of winning a prize of between £25 and £1m. Of course the change of winning the £1m is extremely unlikely – but two people a month have to!!!
Top three Children’s Regular Savings Accounts
Regular saver accounts often pay some of the best interest rates available – and children’s regular savings accounts are no exception. There are lots of Terms and Conditions to be aware of, but as access if often restricted, regular savings accounts are a good way to ingrain a savings discipline from a young age.
These accounts are best for those who don’t have a lump sum but want to save on a regular basis. They are a great way to help your kids to build up some savings.
Often Regular Savings accounts will have a fixed term – after which the cash is moved to an easy access account paying a lower rate in interest. Therefore it’s important to review where to deposit the lump sum that has been built up, at that time.
Halifax Kid’s Monthly Saver – 3.50% AER
This account has a 12 month term and you can save between £10 and £100 per month by standing order. You can amend the amount but you can’t put more than £100 in each month, even if you have paid less in a previous month. No withdrawals are allowed within the term.
On maturity, the money will be automatically transferred into a Halifax Kid’s Saver – which will be opened during the application process. This is an easy access account currently paying 1% AER. The Kid’s Monthly Saver will then be renewed for another year at the prevailing rate of interest at that time – so you can continue to save on a regular basis if you want to.
Dudley Building Society Junior Easy Saver – 3.50% AER
This also has a 12 month term and you can save between £10 and £150 per month. There is no access until maturity. On the account anniversary, the proceeds will be automatically reinvested into a Junior Easy Saver Instant Access 2 account which is currently paying 1.75% AER.
If the child turns 16 during the term of the Junior Easy Saver, on maturity the funds will be transferred to an Adult Easy Saver Instant Access 2 which is currently paying between 0.20% and 0.50% AER.
Barclay’s Children’s Regular Saver – Issue 1 – 3.50% AER
You can save from £5 to £100 per month by standing order and again the term is 12 months. But unlike the accounts mentioned above, you can make withdrawals although the interest rate will fall to 1.51% AER for months that withdrawals are made.
On maturity the account will convert to the children’s instant savings account that is available at that time.
The Junior ISA (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. The account cannot be cashed until the child turns 18, at which point they will have unfettered access to the money.
As there is no access to any money held in a JISA until 18 years old, it is best for those parents looking to build a tax-free nest egg for their children, hopefully to help them through University perhaps, or maybe to buy their first home.
As mentioned above, a really good reason for parents to contribute into a JISA as opposed to a standard child’s account, is 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.
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 for the intended purpose. If the child becoming entitled to a relatively large amount of money at age 18 is a concern, then keeping the funds in the parents’ names and gifting them at a later date or using a trust could be more appropriate, even if this is not as tax efficient as the Junior ISA option (both in terms of tax on the interest/growth from the investments and potentially from an inheritance tax point of view).
If you, your friends and family were able to gift a total of £9,000 a year to a child from birth (the current Junior ISA allowance), 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.
Don’t forget children aged between 16 and 18 can open a Junior ISA (£9,000 p.a.) and an adult Cash ISA (£20,000 p.a.) to put a total of £29,000 p.a. into tax free savings.
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.