Leanne Macardle

Leanne Macardle

Editor
Published: 06/12/2018

At a glance

  • Start saving for your child or grandchild sooner rather than later to benefit most from compound interest.
  • You can choose from a wide range of savings options for children; regular saving, fixed rate bonds, notice accounts and easy access accounts.
  • If you give your child money to save which earns more than £100 in interest then it is taxed as if it were your own interest.
  • Remember to consider Junior ISAs and Child Trust Funds.

Whether you want to invest money for your little prince or princess's future or they're keen to open their first savings account themselves, it pays to shop around for the best deal.

Getting started with children's savings accounts

The sooner you can start saving for your child, the better – even if it's a relatively small amount. That's because money kept in a savings account over a number of years can benefit from compound interest.

The great thing about compound interest is that your child's money snowballs, as you can see below.

 

£30 per month in a 3% account

£60 per month in a 3% account

 9 Years

£3,723.56

£7,447.13

 18 Years

£8,599.66

£17,199.31

Source: Moneyfacts.co.uk monthly savings calculator

Note that even though you'd pay the same amount into the account, that £30 invested every month for 18 years far exceeds the return you'd get on £60 invested for nine years – by £1,152.53 to be precise!

The majority of savings accounts for children allow you to open an account from the child’s birth, although some require the child to be a little older. Be mindful that some accounts set a maximum age, too – they don't all automatically run until your child reaches the age of 18, or even 16, and there are some children's savings accounts that only run until your child reaches the age of 11!

Types of children's savings accounts

There are four main types of children's savings accounts: fixed rate bonds, regular savings accounts, notice accounts and easy access.

Some banks and building societies like to offer freebies (often a moneybox) to entice your child to save with them. While freebies are good, remember that it's the suitability of the account for your child, as well as whether the account is competitive, that should be the main factors in your decision.

Product Type

Pros

Cons

Fixed rate bonds tend to pay higher interest rates, and can be available on terms of anything up to five years.

Get a better rate for a lump sum you have to invest for your child.

Not a suitable option if you want to save regularly for your child.

You may not be able to access the money during the term of the bond.

If interest rates go up during the term of the bond, your child may be earning less interest than what the best children's savings accounts are paying.

Regular savings accounts can pay fixed or variable rates of interest. They are designed to help you get a nest egg built for your child by requiring a minimum amount to be paid in each month.

Get a better rate on the regular amounts you save for your child.

Not a suitable option if you have a lump sum to save for your child.

There may be restrictions or penalties if you need to make a withdrawal.

You may have to commit to making a minimum number of payments over a 12-month period.

Notice savings accounts can pay a higher rate of interest than an easy access account. They can be great if you have both a lump sum and a regular amount to save.

You could get a better rate than on an easy access account.

You could get a higher rate with a fixed rate bond for a lump sum or on a regular savings account.

If you need to access the money, you will have to give a specified period of notice before you can make a withdrawal. Some accounts will let you access the money sooner – but this will be at the expense of losing some interest.

Easy access accounts allow you to make withdrawals from the account without giving any notice. Some accounts also have a cash card and can be good for a child who wants to have access to their savings.

Your child can get quick access to their savings; it can be a great starting account to get your child used to managing their money.

Your child can get quick access to their savings! You'll need to think about the amount of money that's put into the account, and whether you trust your child (if they are to have control of the account) to be sensible with this potential spending power.

Many easy access accounts actually pay more than the top notice account rates.

There will be higher-paying alternatives if you are saving for a longer-term goal.

Taxation of money you give to your child or grandchild

In most cases, children don't pay tax on their savings interest. This is because the majority don't receive enough income to exceed their personal income tax allowance of £12,500 (in the 2019/20 tax year). Interest is now paid by banks or building societies without tax being deducted so there should be nothing further to do for the child's tax position.

However, there is still a little known issue with interest paid on savings for children. If the interest earned on cash you have given to your own child exceeds £100 per year, then this is taxed as if it were your own interest. Any cash given by grandparents or other family members or friends isn't subject to this £100 limit.

Why invest in a Junior ISA or Child Trust Fund?

As we said earlier in this guide, most children don't pay tax: so why would you invest in a tax-efficient Junior ISA (JISA) or Child Trust Fund (CTF)?

  1. Your child may be a taxpayer. You could have a child prodigy on your hands, or, for older children – particularly those who leave school at 16 or 17 into the world of work – making the most of your child's tax-efficient CTF or JISA allowance makes sense.
  2. One big reason to use a JISA/CTF is that the money can definitely not be accessed until your child turns 18. This makes them a great place for longer-term savings as it puts the money out of temptation, for your child, and for you!

 

Child Trust Fund (CTF)

Junior ISA (JISA)

  • If your child was born between 1 September 2002 and 2 January 2011, they will have a CTF.
  • If you didn't open one for your child, an account will have been opened by the Government on your child's behalf.
  • You can pay up to £4,368 into a CTF in the 2019/20 tax year.
  • This money can be invested into a savings CTF, investment CTF, or a combination of the two.
  • CTFs can be transferred to a more competitive CTF. They can now be transferred to a Junior ISA, too.
  • Money invested in a CTF cannot be accessed until your child turns 18.
  • At the age of 16, your child can take over management of the CTF.
  • At the age of 18, the CTF becomes an ISA.
  • If your child was born after 2 January 2011 or before 1 September 2002 and is under 18, they are eligible to open a JISA.
  • You can pay up to £4,368 in the 2019/20 tax year into a JISA.
  • This money can be invested into a savings JISA, investment JISA, or a combination of the two.
  • JISAs can be transferred to a more competitive JISA.
  • Money invested in a JISA cannot be accessed until your child turns 18.
  • At the age of 16 your child can take over management of the JISA.
  • At the age of 18, the JISA becomes an adult ISA.

Ready to start saving?

For more information and the best accounts, have a look at the children’s savings and/or Junior ISA pages.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

woman and child by window

At a glance

  • Start saving for your child or grandchild sooner rather than later to benefit most from compound interest.
  • You can choose from a wide range of savings options for children; regular saving, fixed rate bonds, notice accounts and easy access accounts.
  • If you give your child money to save which earns more than £100 in interest then it is taxed as if it were your own interest.
  • Remember to consider Junior ISAs and Child Trust Funds.

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