We form many lifelong habits when we’re children, both good and bad, and a smart approach to personal finance is no exception. As a parent, it could be wise to help your kids learn good financial habits early on – and a children’s savings account is perfect for doing just that.
What are children’s savings accounts?
Children’s savings accounts function in much the same way as their adult equivalents, offering a safe place to keep money and rewarding savers with interest for doing so. However, although broadly similar, children’s savings account do tend to differ in three areas.
If you’re trying to encourage kids to save, the good news is that most children’s savings accounts receive a much higher interest rate than adult savings accounts. The best rates today are around 4.5%; a lot better than the 1% interest on an adult instant access savings account.
Most children’s savings accounts can be opened online, in branch, or over the phone – but usually they can only be managed in-branch. A few accounts do offer online access after your kid reaches a certain age, though. Likewise, some accounts come with just a cash card – but some will offer a full-blown debit card.
Children’s savings accounts are specifically intended for kids (under 18 years old) and are used by banks to build brand loyalty at an early age. However, each bank or building society will have different restrictions for different features. Generally, as they grow up, your child may gain access to features such as online banking, debit cards, regular current accounts, and more.
What savings accounts are available for children?
Just like the wider UK savings market, there are a number of different options for children’s savings accounts.
Easy access savings
If you want to get your child started in savings, and not discourage the habit by placing too many barriers in accessing their money, then an easy access savings account is probably the best choice.
Just like adult easy access accounts, your child will be able to access their money quickly whenever they want it. However, opting for easy access will reduce the amount of interest they earn. The difference may not be as substantial as in the traditional savings account market, but it is a consideration if you’re looking to get the most interest possible.
If you are looking to maximise the interest your child receives then a regular savings account is probably your best option. As the name suggests, these accounts require your child to pay money in regularly (monthly) to receive the most advantageous interest rate available. However, these accounts require commitment, as some penalise missed monthly payments with lower interest rates, and access to your money is significantly reduced.
Fixed rate saving
Fixed rate savings accounts require the money saved in them to be locked away for the term of the account, which can be up to 5 years. Your child can’t access the money under any circumstances until the period of the fixed rate has expired. If the child is unlikely to need the money over this period, these accounts can be a good choice. In recent years the interest rate from fixed rate savings accounts has reduced relative to their more flexible alternatives, so they’re not as desirable as they once were.
Junior ISAs are the least flexible of all children’s savings products: your child cannot get their money back until they turn 18. Just like adult ISAs, they can be either cash or stocks and shares based. However, the annual allowance for junior ISAs (£4,260) is far lower than adult ISAs (£20,000). Children between the age of 16 and 18 can hold and pay into both adult and junior ISAs, for a total annual allowance of £24,260.
Given their inflexibility, junior ISAs aren’t necessarily the best vehicle to teach kids the value of saving. However, this same inflexibility can make them a great choice for saving for your child’s university education.
Premium bonds are a lottery bond issued by the National Savings and Investments (NS&I) agency, with the added bonus that your investments are guaranteed by the UK government. You can invest up to £50,000, with each £1 earning you a “ticket” for the monthly prize draw. You don’t earn guaranteed interest on premium bonds; rather, you only get money when one of your tickets wins. The more tickets you have, the higher your chance of winning – and over time, if you’re lucky, the return from premium bonds might match a high-interest savings account. Or you might win nothing.
You can withdraw all of your funds from premium bonds at any time, with no penalty. Bonds can be bought on behalf of a child who is under the age of 16 by parents, grandparents and great-grandparents.
Children’s current accounts
Often overlooked by parents, the humble current account can be a great savings option for kids. Banks, motivated by the prospect of a lifelong relationship as the child grows up, offer generous rates of interest on their children’s current accounts. These accounts, like other current accounts, also offer the advantage of instant access to money – often through an ATM.
Can I pay into my child’s savings account?
Yes, but you will pay income tax if the child’s savings account then earns a significant amount of interest. This is to stop parents from opening a savings account in their child’s name to get a better rate of interest than the equivalent adult savings accounts.
You can give your child some money to put into their savings account, but you need to be aware of how much interest your child can then earn before you should declare it to HMRC. The limit is £100 per year plus your personal savings allowance, which depends on your income tax bracket. Don’t forget that your PSA applies to any other savings accounts you might have, too (but not your ISAs).
Children’s savings account FAQ
Do children pay tax on savings interest?
Maybe. A lot of people mistakenly believe that children are exempt from paying tax, but this isn’t the case. Children can pay tax if they earn enough to do so – and of course, they already pay VAT. Most children aren’t employed, however, and therefore don’t pay income tax – which means they have the standard £11,850 tax-free allowance to play with, plus the £1,000 personal savings allowance, and a further £5,000 ‘starter rate’ tax break for people with very low incomes. Your child probably won’t earn over £17,500 in interest from their savings per year, so there isn’t much to worry about.
The one exception to this rule is if your child earns more than £100 in interest from money gifted to them by a parent. In that case, the child will pay tax at the same rate as the parent.
Should my child use a junior ISA?
Perhaps. ISAs provide a great tax-free wrapper for up to £4,260 in savings per year (2018/2019). Since most children aren’t employed and therefore can earn up to £17,500 from their savings before they get taxed, the benefit of junior ISAs is not as clear-cut. It’s also worth remembering that only children born after 2nd January 2011 are eligible to open junior ISAs.
How old does my child need to be to open a savings account?
Depending on the account you wish to open, you can start an account for a child at any age. However, if you want the account to be in your child’s own name, they will need to be at least seven years old.
Are children’s savings deposits protected?
Standard cash savings are protected by the Financial Service Compensation Scheme. However, if you opt for a stocks & shares junior ISA, its value could go up or down. The risk of losing the entire sum is low, but it shouldn’t be ignored.