Saving for Children
Most banks and building societies have at least one savings account aimed at children, which you can usually open for your child with as little as £1.
Choosing a savings account for your child is really little different to choosing one for yourself. You need to decide whether a fixed or variable interest rate might
be the better option then shop around for the best deal.
If you're new to saving then please read the Candid Money Introduction to Saving. This should help you understand
interest and why inflation can be a threat. It also covers safety and how your child's savings are protected.
Interest
Holding your child's cash in an account paying a competitive rate of interest is key. This means not only finding a good deal initially, but also reviewing the rate
regularly to ensure it remains competitive.
Fortunately, banks and building societies tend to pay decent rates of interest on child accounts in the hope of winning loyal long-term (hence profitable) customers
at an early age. Nonetheless, rates still vary and while children's accounts seem to be less susceptible to the types of crafty marketing tricks
outlined here, they're not immune.
The Bank of England Base Interest Rate is currently 0.10%. You should be able to find accounts paying 1-2% more than this.
The decision of whether to go for a fixed or variable interest rate really depends on whether you think interest rates will rise or fall in future. If you think
they'll fall then locking into a higher fixed rate now makes sense (and vice-versa).
If your child's savings amount to several hundred pounds of more, then hedging your bets by splitting their savings between both variable and fixed rate savings
accounts could prove wise.
Use the
Candid Variable vs Fixed Rate Savings Calculator to estimate whether a fixed or variable rate savings account might be the best option for you.
The options
There are 5 main options to consider when saving for your child:
Junior ISAs / CTFsVariable Rate SavingsFixed Rate SavingsNS&I Children's Bonus Bonds
You can invest up to £9,000 a year into a Junior ISA for your child. Both savings and investment options are available.
If your child instead has a Child Trust Fund (CTF) then this can be topped up by up to £9,000 a year.
In both cases, children can't get their hands on the money until they're 18, which could be a good thing, and interest is tax-free.
Simple and usually possible to withdraw money without notice. Children can generally get their hands on the money between age 11-16, depending on the terms of their
account.
While interest is taxable, it's unlikely your child will actually pay any tax (see 'Tax' below).
Very similar to variable rate accounts, but the rate of interest of fixed for a period of time, e.g. two years. Withdrawals during this period might incur a penalty.
Fixed rate accounts often have the word 'bond' in their title.
Offer a tax-free guaranteed rate over five years to children under 16 and must be held by an adult for the child.
They sound good on paper but the guaranteed rate is usually unattractive compared to competitive bank and building society accounts. These only really make sense in
the unlikely event a child is a taxpayer and even then, the rate may not compare well to other taxable accounts.
Freebies
In a bid to win young customers some banks and building societies give out a few freebies when your child opens an account. These range from moneyboxes, calculators
and books to discount vouchers.
A freebie is all very well if you were going to open the account anyway based on its interest rate, but don't be seduced into an uncompetitive rate by a few pounds
worth of gifts.
Bank A pays
0.10% a year on its child account and throws in a free moneybox. Bank B offers no gift but pays
1.10% a year.
Assuming the interest rates don't change, after 18 years an initial deposit of £500 would be worth
£509 in Bank A and
£609 in Bank B - a difference of
£100 - that's one expensive moneybox!
Tax
Children have the same annual income tax allowance as adults, currently £12,570. This means that if their sole source of income is
savings interest and their account pays 1.10% a year, they'd need a balance of £1,142,728
before they start to trouble the taxman.
Parents who give money to their child (i.e. put money into the child's savings account) should be aware that the interest will be taxed as theirs if it exceeds £100
(per parent) a year. This doesn't apply to gifts made by others, e.g. grandparents. To put this into perspective to generate £100 a year from an account
paying 1.10% would require a balance of £9,091.
Kid's Savings Jargon
Here's some of the more common kid's savings jargon you might come across:
| £100 Rule | If a parent gives their child money (which is saved or invested) and the annual income exceeds £100, it's taxed as the parent's. |