THINKING of putting money aside for your little one? We reveal how to find the best children’s savings account.
Savings accounts for children work in a similar way to adult ones though interest rates tend to be higher.
What is a children’s savings account?
A children’s savings account can be a great way to put money aside for your loved ones and also to teach them about saving money.
The rates of interest tend to be higher than in adult accounts and there are minimum and maximum contributions, usually of up to £100 per month.
This limits how much interest a kids saving account can earn.
How do children’s savings accounts work?
There are a few different types of kids savings accounts.
There are regular saver accounts that pay annual interest on monthly contributions.
Alternatively, some accounts may pay a variable rate on a certain balances.
There may be different rules on withdrawals each year and accounts can usually only be opened for children up to the age of 18.
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Some may come with a debit card that helps children learn about spending.
Children also have their own tax-free savings account known as a Junior ISA (JISA).
This lets parents, grandparents or family members contribute to an account that earns interest tax-free.
Up to £9,000 can be put into a JISA each year and there are cash versions that pay a set rate of interest, or a stocks and shares one that invests in funds and the stockmarket.
A child can start managing their own JISA from age 16 but can only access the money from age 18.
Should I open a Junior ISA or kid’s savings account?
A JISA offers tax-free saving, which means you don’t pay any interest and keep all your returns.
However, you can only put up to £9,000 into the product so if you want to save more then it is also worth considering a child savings account.
It is worth comparing the rates on offer between a JISA and a kid’s savings account.
You may get a higher rate on a kid’s savings account but this may be up to a maximum balance or monthly contribution.
Children also get the personal savings allowance (PSA) that lets them earn £1,000 of interest tax-free each year.
Do children pay tax on savings?
Technically, a child does have to pay tax on their savings but they are unlikely to be earning enough to go beyond their tax allowances until they start working full-time.
Like their parents, a child gets a personal tax allowance, currently £12,570.
This is the amount they can earn from their savings or other income before paying any tax.
There is also a savings starter rate that encourages low earners with income below £17,570 to save. It is worth up to £5,000 and, once you add the £1,000 PSA, they can earn £18,570 before any tax is due.
A child tends to not have any earnings and is unlikely to get more than £18,570 from savings interest so in most cases won’t have to pay any tax.
At what age can a child get a savings account?
As with any type of saving, the earlier you start the better as you can earn more interest.
The minimum age for a child’s savings account depends on each provider.
Many will let you start an account as soon as your child is born.
It may be tempting to start even once you are pregnant, but this is not possible as you will need the child’s birth certificate as well as proof of your own ID and address to open an account.
Some providers have maximum ages ranging from 15 to 17 or 18, after which the account will change to a different type of product and the interest rate may decline.
Are children’s bank accounts the same as savings accounts?
A children’s bank account is different to a savings account.
The best children’s savings accounts pay a decent rate of interest and let parents or grandparents put money aside on behalf of a child.
These can typically be opened from when a child is born.
In contrast, a kids bank account can help teach young people about budgeting and money management.
It is like a current account for adults, with children often being given a debit card, minus the overdraft, as well as access to an app to monitor and manage their spending.
Some pay interest or offer freebies such as piggy banks or school bags.
As with any account, parents can transfer money so you can top it up with pocket money either through online banking or an app and a child can make withdrawals and spend as they wish.
A child’s bank account can typically be opened from age 11 and once they reach 18 they will need to move to an adult version.
Can I save my own money in my child’s savings account?
You can put as much into your child’s savings account as you wish but there is a tax trap that parents can fall into.
If contributions into a child’s savings account from one parent earns interest of £100, or £200 for both, then it will be added to their own savings income.
This is to stop parents just using their child’s savings allowance to boost their own.
It doesn’t apply to other family members such as grandparents or friends.
If there is a risk of your contributions earning more than £100 interest in a child savings account, it may be worth putting the funds into a Junior ISA instead where the returns are tax-free.
How much money can I gift to a child?
The so-called Bank of Mum and Dad is often called on to help kids with weddings or a house deposit.
In many cases, you can gift money to your children tax-free to help with key life events.
The main risk is that your loved ones may have to pay inheritance tax if you die within seven years of making the gift.
The taxman provides everyone with an allowance of £3,000 that they can give as gifts each year without any inheritance tax risk.
This amount can be rolled over to the following year only once.
You can also give as many gifts of up to £250 per person as you want during the tax year as long as you have not used another exemption on the same person.
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Additionally, each year you can gift £1,000 per person for a wedding or civil partnership present, rising to £2,500 for grandchildren and great-grandchildren or £5,000 for children.
You can also help with another person’s living costs, such as an elderly relative or a child under 18.
These are known as exempt allowances.
But beyond that, if you gift more than your exempt allowances there is a risk of it being included in the value of your estate.
That could leave your loved ones liable for inheritance tax if your assets are worth more than the tax-free threshold, which is currently £325,000.
This comes under the seven-year rule.
There is no inheritance tax to pay if a gift was given more than seven years before your death: this is known as a potentially exempt transfer.
But there are inheritance tax charges of 40% on gifts given beyond the allowance in the three years before you die.
Gifts made three to seven years before your death are taxed on a sliding scale known as ‘taper relief,’ starting at 32%.
How to choose the best children’s savings account
Children’s savings accounts are offered by a range of banks and building societies and it can take time to search for the most suitable rates.
You could try the bank that you have your own current account with as they may have exclusive rates, but it is also good to shop around as these may not be the best deals.
A comparison website can help you compare products in one place and find the best children’s savings account based on the amount you want to save and the rates on offer. They may even be able to help you set up the account.
Consider how long you want to save for, how much you are looking to save and how much you can afford to put aside, as providers will have different requirements on contributions and minimum and maximum balances.
Also, keep a note of when a product term ends as often the rate will reduce and it could be worth moving the money to a better-paying account.
What are some of the alternatives to child savings accounts?
A JISA or standard child savings account are the main banking products aimed at kids.
You could also open a children’s current account for them but the interest rates tend to be lower.
Another option could be to just allocate money you are saving yourself to spend on your children.
This may be beneficial if you want to keep control of the money especially as they approach their teenage years, although you would miss out on using the JISA allowance and their PSA.
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