Many children will have received cash over Christmas, and most will spend it pretty quickly. But if the sums are quite generous – or if you want to get your children into the savings habit early – this is one area where there are still some decent returns to be had.
Instant-access accounts can be found paying 3% interest, while one regular savings account for children pays a very welcome 6% … more than almost anything out there on the market.
Regular-savings accounts
By far the highest return on any children’s account right now, at 6% gross, is the Halifax Kids Regular Saver. As the name suggests, however, this is not really designed for a one-off, lump-sum deposit but is definitely tempting if you can afford to separately stash a bit of cash. It requires you to commit to saving a regular amount of between £10 and £100 a month for 12 months. This branch-based account pays interest at the end of the 12-month term, during which no withdrawals are allowed.
Easy/Instant-access accounts
Many parents will be looking for a staightforward easy-access account which will allow them to make withdrawals whenever they like without any notice and add future birthday and Christmas money.
Best-buy tables from independent financial product comparison websites like Moneyfacts.co.uk reveal that many of the easy-access accounts actually pay higher rates than notice accounts, so your child will not be losing out by having quick access to their savings.
But be careful when checking out the chart-toppers because some come with restrictions and are not as simple as they seem at first glance.
Take Nationwide’s Smart Limited Access account, for example. This legitimately tops the charts for the instant-access accounts, paying 3% gross on deposits from £1 to a maximum of £50,000 and is available to children from birth. However, this only allows one withdrawal a year while continuing to pay the 3%. Once you make a second withdrawal, the rate drops to 0.75% for the remainder of the year.
HSBC’s MySavings, which also pays 3% gross, but is relegated to second place in the Moneyfacts best-buy table by Nationwide’s offering, might actually appeal more to many parents.
It is open to seven to 17-year-olds, requires a minimum £10 deposit and pays 3% on the first £3,000 – any balance in excess of £3,000 earns just 0.5%.
But there are no restrictions on the number of penalty-free withdrawals you can make so, if your child’s savings are never likely to top £3,000 and you want genuine easy access, this is arguably the one to go for.
Next best buy, paying 2.5% gross on balances of £1 to £25,000, is the Mansfield building society’s Young Saver open to children aged 0-17. It allows six free withdrawals each calendar year with additional withdrawals subject to the loss of 30 days interest on the amount withdrawn.
Also worth considering is Skipton building society’s Leap Account, a true easy-access account with no restrictions on withdrawals, paying 2.25% gross on £1-£50,000 and open to account holders aged 0-17. Note that two rival accounts paying 2.25% gross – Lloyds Bank Young Saver and the Halifax, both drop their rate to 0.5% on savings above £2,000.
Parents choosing one of these need to be comfortable with their child having access to their savings, perhaps viewing it as a way of learning to manage their money.
Virtually all of these allow children to manage their own accounts from age seven with a passbook and some, such as the HSBC MySavings, offers holders a Visa debit card from age 11 so they can spend their money in shops, online or take it out at cash machines.
Fixed-rate children’s bonds
The easy-access accounts mentioned above all pay “variable” interest, which means the rate may be raised or lowered over time, so parents will need to keep an eye on any changes to see that the account remains competitive.
If you particularly want your child to have a fixed-interest account, where the rate will remain the same until maturity, the highest-paying option is the Jumbo Junior Fixed Deposit from the State Bank of India, a five-year bond paying 2.9% on a minimum lump sum deposit of £1,000 (maximum £100,000).
Savings bonds like this are suitable only for a one-off, lump sum deposit that parents want their child to leave untouched for the specified term. You cannot invest more after the initial deposit and you cannot withdraw any of the money until the bond matures and the interest is paid in five years.
Fixed-rate, five-year renewable Children’s Bonds, paying 2.5% tax free in fixed yearly instalments, are available for lump-sum investments of between £25 and £3,000 per issue in £25 units, per child, from government-backed National Savings and Investments (NS&I). Only parents, guardians and (great) grandparents can buy them for anyone under 16.
Junior Cash Isas
If you want a home for longer-term savings that your child will not be able to access until they are 18, consider a tax-efficient Junior ISA (JISA).
JISAs always pay interest free of tax – in case your child does exceed their personal allowance in their teens – and the £100 rule for interest earned from money given by parents or step-parents does not apply. You can save up to £4,080 in the 2015-16 tax year in a JISA and anyone can pay into it once opened. The child can take charge of the account at 16 but cannot access the money until 18 when it becomes an adult ISA.
The Coventry and Nationwide are both offering the best rate cash JISAs, paying a variable tax-free rate of 3.25%. Both accept full balance transfers from poorer-paying JISAs and from CTFs.
Halifax’s Junior Cash ISA variable rate is 3%, but it is paying a chart-beating 4% if the parent holds a Halifax adult cash ISA or if the child is 16 or over.
Tax on child accounts
In most cases children do not have to pay tax on interest because they do not receive enough income to exceed their personal income tax allowance (£10,600 in the 2015-16 tax year).
When you open a savings account for your child, you can fill out a form R85 at the relevant bank or building society which will tell them to pay gross interest on the account without deducting 20% tax, as is normally done automatically. If you later want to reclaim tax for your child, you can complete form R40, available online at gov.uk.
But parents, particularly those who can afford to save a lot of money in their children’s name, should be aware that if a child earns more than £100 interest in a tax year from money given to them by one parent or step-parent, the parent is liable to pay tax on that interest at the same rate they pay on their own savings interest.
This applies whether or not the child has exceeded their own personal allowance. This special £100 interest limit does not apply to money given by grandparents, relatives or friends, however, though there may be inheritance tax to pay if the person making the gift dies within seven years of making it.
