Saving £5 a week for your child will add up to enough money to put down a deposit on their house. But it can be complicated to find the best children’s savings account. Read on for a clear and unique guide about children’s savings accounts.
- There are three types of children’s savings accounts, with differing levels of access.
- Children have to pay tax on any savings more than £100.
It is never too early to start thinking about a bank account for your child. What better start in life could you give your child? Teaching them how to deal with money and budgeting can save them from taking quick loans UK when they grow older.
If you prefer to open an account for your child when they are older, they can be part of the decision-making process. Just think of how many life lessons they can learn when you teach them about savings, how banks work, etc. Teaching your children the benefits of saving regularly is a lesson which will stand them in good stead for the whole of their lives.
- Why children should have a savings account
- The different types of children’s savings accounts
- Factors to consider before opening an account and the best children’s savings accounts
- How to open a child’s bank account
- Bank freebies for children
- Whether parents can save in their child’s account
- Whether children pay tax and how to avoid paying tax on children’s savings.
Types of Children’s Savings Accounts
When it comes to banking, some people are confused by the whole process. It can be complicated to compare different types of accounts and decide which gives the best return. Let’s start with the basics: What types of savings account are there for children?
Easy/Instant Access Children’s Savings Accounts
Easy or instant savings accounts allow you or your child to deposit and withdraw money as you wish. The ease of access means that the interest rate may be lower than other kinds of savings account.
But be careful when choosing an instant access account. Some accounts only allow a certain amount of withdrawals before they drop the amount of interest they pay you.
With regular savings accounts, you are committed to putting a certain amount of money in every month. Different financial institutions vary in the amount that they expect you to deposit every month. But, as a rough guideline, it’s usually around £5-£100. In return for making regular deposits, you receive a higher interest rate. Some accounts allow you to make a limited number of withdrawals a year or to miss a monthly payment without being penalised. Other accounts will reduce the interest rate if you take out any money or neglect to put in any money in any one given month.
Notice or Fixed Rate
Notice accounts are suitable if you don’t expect to need to withdraw any money. It is left in the bank to collect interest. If you do wish to take out any money, then the bank has to be given three months’ notice.
Fixed rate savings accounts mean that the money is tied up for a set period, which can be anything from 1-5 years. However, the interest rate tends to be higher than any other kind of account.
Best Children’s Savings Accounts
It is difficult to give a list of the top savings accounts for children. It depends on what you are looking for and how you would like to operate the account. Also, financial services such as interest rates can go up and down. You might find that the information given on websites very quickly becomes dated.
For an unbiased consideration of different children’s savings account, you could visit the website of the consumer watchdog ‘Which?‘. Like other financial services, it is worth using different online comparison tools such as www.moneyfacts.co.uk or www.gocompare.com to get an idea of what is available and which one suits the reason you want to open an account for your child.
Other Factors when opening an Account
Apart from the difference between the savings accounts on offer, there are other factors to consider. Before choosing an account, check on whether your child is eligible since some accounts have age restrictions. Another thing to bear in mind is how you would like to do any banking transactions: in person, by post, by phone or by internet? Not all banks and building societies give you a choice so if it is only in person, how close are you to a branch? Another thing to remember is that some banks will only open an account for a child if one of the parents is one of their customers.
Also, the savings account that you choose depends on how much access you would like you and your child to have to the money. This depends on which financial goal you have in mind. Do you intend the money to be locked away until they reach a certain age? Do you wish them to learn to save for something they particularly want? Or, do you want them to have more access to deposit and withdraw money under your guidance?
Finally, when looking at highly attractive interest rates offered by a bank, check whether there are any restrictions on how much you can receive this top rate for. Some accounts only offer a highly competitive 3% or more for sums up to £2,000-£3,000. Then the interest rate drops to 0.5%.
Opening a Child’s Bank Account
You can open an account for your child using your identification. You will need proof of current address (a household bill that is no older than three months). From 7 years old, your child can open their own account. If they do not possess a passport, they can use their birth certificate and NHS medical card as proof of identity. They could also use one of your utility bills as proof of their residence. To open most bank accounts you only need to deposit £1 at first.
Most banks will only allow you to open an account in person. Given the changes in staffing levels in High Street banks, you can no longer just go in and open an account on the spur of the moment. To save time, make sure you make an appointment beforehand by phone, so you don’t have a wasted journey.
Bank Freebies for Children’s Savings Accounts
Most banks work on the theory that if they give a child a fluffy toy or novelty-shaped piggy bank, then they have guaranteed their customer loyalty for the rest of their banking lives. Nobody knows whether this has ever actually worked but nowadays probably less so; with internet banking, people simply don’t build up the same relationship with their local branch and its staff as they used to.
If your child is old enough for you to sit down and discuss the benefits of different accounts, are you even going to deal with the freebies that some financial institutions offer? It is a good time to discuss interest rates so that your child will learn vital skills in choosing the right personal loan. But, at the moment, given the choice between a higher interest rate and a free piggy bank, what do you think your child is going to choose? It is up to you how to deal with this issue; maybe you could not mention it at all. Or you could always open two accounts for the child as there is no limit on the number of savings accounts that a person can hold.
Parents Using a Child’s Account to Save
When some people see the attractive interest rates on children’s accounts, which can be advertised as high as 6%, they wonder why they shouldn’t take advantage of this to deposit their own money. This seems like a money-making idea in two different ways. Firstly, to make higher returns on their savings and secondly, to avoid paying tax on the interest they have earned. Sounds like a very good idea, doesn’t it? However, there are some problems with this idea.
The first is how your bank or building society operates its scale of interest. The savings account is aimed at children, who don’t earn money and therefore don’t usually make high deposits. This top-rate interest is only usually paid up to a certain limit, sometimes as low as £2,000.
The second reason concerns the tax-man; surely children don’t pay tax, do they?
Do Children Have To Pay Tax?
It is a common misconception that because children don’t earn money, it follows that they don’t have to pay taxes. But children do need to pay tax on children’s savings. Children have a personal tax allowance of £11,000 like anybody else. But, there are special rules put in place by HMRC for interest on children’s savings accounts. These rules are there to prevent parents trying to take advantage of their children to avoid taxes.
If the money deposited in the account comes solely from the parents and/or step-parents, then any interest earned over £100 is taxed at the same rate as their parents (or £200 if parents earn and deposit independently). In fact, the whole amount is taxed and not just the surplus amount. So it is doubtful whether you will find yourself much better off. You also have to consider the legal ramifications. Usually, this type of practice is tax evasion. Additionally there is the ethical aspect of using your children in this way.
This rule, however, only applies to money deposited by the child’s parents. If grandparents or aunts/uncles put money into the bank, then this rule doesn’t apply.
Avoid Tax on your Child’s Savings
One way that you can legally avoid paying tax on your child’s savings account is by opening a Junior ISA. The Junior ISA replaced the Child Trust Fund Scheme in November 2011.
To be eligible for this scheme, your child must be under the age of 18 and resident in the UK. Their parent/guardian opens the account on the child’s behalf. The money belongs to the child although the cash can’t be touched until they reach the age of 18 (in exceptional circumstances, this can be reduced to 16). The limit for this savings account for the 2016-17 tax year is £4,080 per year and the interest on the savings is tax-free.
Your child doesn’t have to have a fortune to start saving. Even putting by some of their pocket money or the money they receive from relatives at Christmas and on birthdays will soon mount up. It is important to teach them the concept of saving at a young age so that they can avoid taking instant payday loans when they grow up. It is hopefully a habit which will stay with them for the rest of the lives.