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Pop a savings account in your child’s stocking this Christmas

Stumped as to what to buy your little treasure? Why not choose a gift that will teach them how to save?

By Esther Shaw

Published: 09 November 2020

Christmas stocking

Find a new savings account

With just a few weeks to go until December 25, parents will be busy trying to work out what presents to stick under the tree this year.

Top ‘must-have’ toys for Christmas 2020 include the Lego Super Mario Adventures game, Paw Patrol Dino Patroller and the Vtech KidiZoom Studio.

But given the ongoing Coronavirus crisis, Christmas may be a little different this year, with many family budgets feeling the upheaval of lockdown and the strain of reduced incomes.

With this in mind, rather than spend cash on presents that may only get played with a few times before being discarded, why not think about putting something a little longer-lasting in your little one’s stocking?

Pick a financial gift this festive season

Christmas is a great time to teach little ones about the value of money – and how to look after it.

Admittedly, a Junior ISA or children’s savings account may not be particularly exciting to unwrap on the morning of December 25. But a gift such as this could grow into a very welcome nest egg by the time your son, daughter or grandchild turns 18. Early saving encourages positive lifelong habits.

There are now a whole host of ways to gift money. Here we take a closer look.

Set up a Junior ISA

A Junior individual savings account (ISA) is a tax-efficient, long-term savings account which you can open for your child.

Once set up, parents, grandparents and other family members can pay in a total of up to £9,000 each year.

The money cannot be accessed until the child turns 18.

As a parent, the key decision you need to make is whether to opt for the cash or stock and shares option.

While money held in cash is safe – as it’s protected under the Financial Services Compensation Scheme – rates on savings are very low right now.

Given the time-frame, stocks and shares are likely to produce a better return. But you need to research carefully, and be aware that investing is not risk-free. To find out more, head here.

Open a dedicated children’s savings account

If you are looking for a super simple way to start squirrelling money away for your son or daughter, you might want to consider a children’s savings account.

Good basic accounts help children understand everyday money.

Be aware though, this type of account is not tax-free. That said, children are unlikely to earn more than then personal allowance of £12,500.

Remember to shop around for the best rates.

At present, HSBC is paying 2.5% AER (2.47% gross variable) on balances up to £3,000 in its MySavings instant access account for children aged from seven to 17. Santander’s 123 Mini account pays 3% AER (2.96% gross variable) on balances of between £1,500 and £2,000, 2% AER (1.98% gross variable) between £1,000 and £1,499.99, and 1% AER (variable) on less than £1,000.

Higher rates may be available on regular saver accounts, but be sure to read the Ts and Cs.

You can get a fixed rate of 4% AER on the Halifax Kids’ Monthly Saver for the first year, but you must pay in between £10 and £100 a month and no withdrawals are permitted during this time.

Buy premium bonds

As a parent, you can buy premium bonds on behalf of your child, starting from as little as £25. These must be held in the parent’s name until the child turns 16.

These products, from National Savings & Investments (NS&I) could make for a more ‘exciting’ present for your little one, as the bonds are entered into a monthly prize draw with the chance to win tax-free prizes from £25 to £1 million.

While this can make them more fun, you need to be aware that premium bonds don’t pay interest.

What they do pay is a ‘prize fund rate.’ This used to be equivalent to 1.4%, but is dropping to 1% in December.

Before buying bonds, remember there is the chance your son or daughter won’t win any prizes – and therefore won’t get any return at all on their money.

Open or top up a pocket money apps

Another good way to teach your little one about the value of money – and how to manage it – is with a pocket money app. Popular apps include GoHenry, Osper, Nimbl and Rooster Money.

But make sure you understand how each of these works to ensure you choose the app that is right for your little treasure.

Start saving into a pension

Finally, you might not realise this, but you can open a pension for your child. This will help them enjoy a wealthier retirement.

As with a Junior ISA, this is a tax-efficient saving option, meaning there is tax relief on the contributions.

Up to £2,880 can be paid in each year, which the government will top up to £3,600 through tax relief at the current 20% basic rate tax.

The child won’t be able to access this money until their mid-50s, meaning this really is a long-term saving product.

With this in mind, you are perhaps best only thinking about a pension once other more accessible savings options are in place.