The humble piggy bank no longer has the monopoly when it comes to children's savings – these days there's a plenty of competition for kids' pocket money and more substantial investments too. There are simple accounts which you can access when you want, fixed accounts which pay a bit more interest, and regular savings accounts for bigger returns both on a short term and long term basis. The latest addition to the stable is tax free Junior ISAs which have replaced Child Trust Funds – the accounts government used to pitch in to – which have now been abolished for newborns.
Here are your options when it comes to children's savings accounts:
The basic account...
On the simplest level there are instant access accounts that you can open up with £1 and pay in and take out whatever you like, whenever you like. They are usually accessed with a passbook in branch or with a cash card for use in ATMs for older children and they pay interest at a variable top rate of somewhere in the region of three per cent a year. Children have the same tax-free allowance as adults – £7,475 per year. If they don’t have any more than this amount paid in total into their collective accounts they won’t have to pay tax on the interest they earn. However, you will have to fill in an R85 form which the bank can provide to register tax free status. Most of these types of accounts offer a free present too – if you’re lucky you could even get our old piggy friend.
...And its longer term equivalent
You can often get a much better rate by taking away your right to instant access to the cash by placing the money as a fixed lump sum into an account for a set number of years – usually up to five. Interest rates of up to five per cent are available through this route but there will inevitably be a hefty penalty if you take the money out early.
The regular saver account...
The next level up is a yearly kids’ regular saver account. These typically pay a fixed rate of up to six per cent interest per year where a monthly input is made. Most of the banks allow you to save between £10 and up to £250 per month into the account and you can usually decide to increase or decrease the amount as you choose, month by month. At the end of the term the total saved plus the interest awarded is transferred into another account and the cycle starts again.
...And its longer term equivalent
Junior bonds offer the option to save regularly over a much longer period – usually for a minimum of ten years. With these you have to commit to a regular monthly payment, typically anywhere from under £10 to £100, and this payment cannot be broken or changed through the life of the agreed term. Some providers offer the option of choosing a fixed date for when the bond will mature, say, for instance, the child's eighteenth or twenty-first birthday. When the bond matures the child has the option of taking out the money, continuing the payments or reinvesting the lump sum. So called friendly or benevolent societies are able to offer these accounts tax-free.
There will almost always be penalties for breaking the terms of one of these accounts by taking out the money early, without prior agreement. However, some accounts offer you the option of taking out a certain percentage of the cash at a certain pre-agreed stage within the term.
Be aware, sometimes these accounts are tied to stocks and shares and the money you put in is reinvested to generate the interest. Here, there is an element of risk – what is eventually paid out could be less than what has gone in. Likewise, it could be substantially more than what a traditional account could offer; it all depends on the markets.
The new kid on the block
Junior ISAs (JISA), the new products available to children that missed out on the Child Trust Fund, which was abolished for new-borns from the beginning of 2011. Anyone can pay up to £3,600 per year into an ISA in a child’s name and, like adult ISA’s, the account will be free from tax – whether or not the child has reached the £7,475 annual income limit. Again as with adult accounts, stocks and shares Junior ISAs will be available as well as standard ones, where the interest rate is set by the issuing bank, and children will be allowed one of each account.
The key element of Junior ISAs is that the money is locked in, accumulating interest, until the child reaches the age of 18, at which point they are given free access to the total money in the account. This is where they replace the Child Trust Fund which worked in the same way but with a limit of £1,200 annually and with government pitching in £250 at birth and the age of seven (£500 for children in low income families). Existing Child Trust Funds can continue to run, also tax free, as before, and the annual limit has been increased to £3,000 in line with the new Junior ISAs. However, government will not be making payments to either type of account.
Whatever you choose...
Since there's no more head-starts from public coffers, it's all the more important that you shop around for the best rate of interest available for the account type that you are after, especially if your plan is to provide your child with a nest egg to get them going when they grow up. Remember, if your rate of interest is lower than the rate of annual inflation the money in the account technically devalues.
Click here to compare children’s savings accounts on Know Your Money.
Author: KYM Editor
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