Getting your kids into the savings habit is a great lesson to teach them and there are a host of children’s savings accounts to choose from. What’s more there are options for longer term saving too if you’re a parent or grandparent wanting to invest for a child’s future.
Most banks and building societies offer accounts for children and they work in pretty much the same way as ordinary savings accounts. However, you usually have to go into a branch to open a children’s savings account – and a parent or guardian must normally act as the signatory.
The interest rates on children’s savings accounts can be attractive, but you have to choose your account with care. Don’t be distracted by freebies. Many accounts offer free gifts, such as a money box or vouchers, but the interest rate and the terms and conditions are far more important than any marketing gimmick.
Access your cash
Easy access savings accounts are the most straightforward. There are usually few if any restrictions on withdrawals, allowing access to the money at any time. But the rates are variable, so they can move up or down.
You might be able to earn a higher rate of interest in a notice account, which requires notice of withdrawals, sometimes up to 90 days. But you should always compare the rates on all accounts as you might find you can get a better deal with a more flexible easy access account.
Both easy access and notice accounts are ideal if you want to teach your son or daughter about the concept of saving and the value of money. They can pay Christmas and birthday money in but get at it again if they’re saving for something in particular.
Fix for certainty
Fixed rate accounts often pay a higher rate of interest than variable rate deals, but you can’t usually access the money during the fixed term. They also tend to only allow one deposit, at the time the account is opened, so aren’t suitable for ad hoc saving. But they can be a great option for parents or grandparents looking to put some money away for a child’s longer term future.
Regular savings accounts often pay the highest rates, but there are restrictions. You have to commit to a monthly payment into the account. And if you miss a month or withdraw any cash, you could lose interest.
That said, although you need to pay money in each month, the minimums are low - with some accounts you can pay in as little as £10 a month. So this can be a nice way of building up a pot of money.
As with fixed rate deals, regular savings accounts are also more suited to parents and grandparents as opposed to an account where the child can pay pocket and birthday money into.
Are my child’s savings safe?
Money in a children’s savings account will almost certainly be covered by the Financial Services Compensation Scheme (FSCS). If the bank or building society goes bust, the scheme guarantees savings up to £85,000. The limit applies per person, so it should not affect any of your own savings if the account is in the child’s name. But remember that the FSCS does not cover all foreign banks – and the limit applies to a banking group, not individual businesses. For example, if you have money in both Halifax and Bank of Scotland, the scheme guarantees up to £85,000 across the two banks.
Tax on children’s savings
Children are liable for tax just like everyone else. But most little ones never pay a tax bill because they never earn more than the tax free allowance - £10,600 in the 2015-2016 tax year.
But tax is automatically deducted from savings, so you should make sure that you fill in form R85 when you open the children’s account. The interest will then be paid gross and you do not have to bother with the tax man.
A word of warning, though. If the money in the child’s account is given by the parent and it generates more than £100 of interest a year, then it is taxed as the parent’s own. If you think you could fall foul of the £100 rule, you might want to consider a Junior ISA, if your child is eligible.
Compare children’s savings accounts
There are lots of children’s savings accounts on the market, so it’s not always easy to pick the right deal for your child. But MoneySuperMarket is here to help. You can compare every type of account from all the leading banks and building societies with our free independent comparison service. It doesn’t matter what you are looking for, we can help you find it.