Where's the best place to stash your children's savings?
This article was first sent to Fools as part of The Good, The Bad and The Ugly email series.
Savings are front page news at the moment. In tough economic times, a decent savings pot can make all the difference.
And of course, it's good to get into that saving habit as early as possible. Because if the kids of today can learn to put a bit away every month, they'll stand a good chance of avoiding being the debt-ridden adults of tomorrow.
So, in this article I'm going to outline what children's savings accounts are all about. I'm also going to highlight some of the best ones currently out there - so you can set your sprogs on the right track.
Need-to-know
In most respects, children's savings accounts operate in the same way as their adult equivalents. And the good news is that they usually offer better interest rates.
It's also worth knowing that children can earn £100 in interest, tax-free, every year from money given to them by each parent or step-parent.
The majority of children never earn as much interest as this (to earn over £200 a year - at an annual interest rate of 5% - would require £4,000 of savings) so most kids can actually save completely tax-free.
To get your child's interest paid without tax, submit a form R85 to your lender's local branch.
What to look for
So how can you tell which savings account is right for your child? Here are the main factors to think about:
Interest rate: Regular savings accounts pay the highest rates of interest.
For example, Halifax' Children's Regular Saver account currently pays a hefty 10% interest rate, fixed for 12 months, on money saved for a child.
Ease of access: The benefits of a market-leading interest rate need to be weighed up against the ease (or difficulty) with which your child can actually access the cash.
The problem with regular savings accounts is that they're not particularly flexible.
To maintain them, you generally need to make twelve consecutive monthly payments. And you can't usually withdraw the money unless you close down the account and sacrifice lots of that lovely interest.
So - if you or your child can't commit to saving regularly, you may be better off opening an easy access children's account (even if it offers a lower rate of interest).
Minimum/maximum deposit: You should also check out the minimum amount needed to start the account off. For most accounts, the minimum initial investment ranges between £1 and £50.
And investigate whether there's a monthly cap on the amount you can invest. For example, the Halifax Children's Regular Saver allows a maximum deposit of £100 each month, meaning the most you can pay in is £1,200 a year.
Extras: Kids love the shiny extras that often come with children's accounts (remember that moneybox you used to have?) and banks know this.
In a nutshell, just keep your eye on the big picture. It's fine to spend £1 setting up a savings account just to get the gift - your child is allowed to have more than one savings account at a time.
Just don't make this the account you put all the money in if it's got a rubbish rate of interest!
The cream of the crop
Here's a table highlighting some of the best children's accounts currently on the market.
Provider | Account | Interest rate (AER) | Notice or Term | Initial deposit |
|---|---|---|---|---|
Halifax | Children's Regular Saver | 10.00% Fixed | 1 Year Bond | £10 |
Chorley & District BS | Foxley Fund | 6.75% | Age 18 | £1 |
Clydesdale Bank | Children's Savings Bond | 6.00% | 5 Year Bond | £50 |
Harpenden BS | 18 Club | 5.60% | Age 18 | £1 |
Halifax | Save4it | 5.55% | Instant | £1 |
Chelsea BS | Ready Steady Save | 5.45% | Instant | £1 |
Source: Moneyfacts. Information correct as of 02/10/08
As you can see, all the accounts I mention pay interest rates significantly higher than the current 5.0% Bank of England base rate.
If you're able to commit to disciplined saving, the Halifax Children's Regular Saver - with its whopping 10% fixed interest rate - comes head and shoulders above the rest.
You can only invest £100 a month maximum - but if you're canny, and you have more to invest, you can really make the most of this great rate, because up to five adults can open a Children's Regular Saver account in trust for any given child.
This means that, for example, a mum, a dad and an aunty can all open one for the same sprog, and invest a total of £500 a month. Hoorah! The account can be operated in branches, online or by phone.
Just remember that the 10% rate is only fixed for a year. And whatever you do, try not to miss any payments or take the money out early. If you do, any interest will be paid at the current Halifax Save4it account rate of 5.55% AER instead.
In fact, the Halifax Save4it account is actually my top pick when it comes to instant access, variable-rate accounts. It's worth investigating if your contributions are likely to be occasional, or if your child may need immediate access to his or her cash.
The Save4it account is designed for children under 16 - and has a minimum opening balance of just £1.
Your child can make as many withdrawals as they like, with no loss of interest, and kids will also get a free calculator and coin bank.
Just remember that instant access accounts operate a variable rate of interest. So to make sure your child's savings are growing as fast as they should, keep an eye on these accounts in case they suddenly slash their interest rates.
Get your child into the savings habit now, and perhaps the Bank of Mum and Dad won't be needed after all. wishful thinking?
Happy saving!
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