Guides: savings
Savings for children
There is one thing about your children that you can be sure of… they will cost you a small fortune. From pocket money to school and university fees, the Bank of Mum and Dad will never cease to be called upon to shell out money. But there are numerous ways of saving for your children's future, and the earlier you start the better.
From child trust funds to National Savings and ISAs, there are plenty of tax efficient and cost effective ways to save. But they all vary and have different tax advantages, so read this guide to help you decide what type of saving scheme best suits your needs.
Getting children to save at an early age is a useful way of starting them off in a worthwhile habit for the rest of their lives. Most banks and building societies will offer at least one account that is designed for children and some of them offer a range of different accounts based on various different age bands. Free gifts, such as a piggy bank, are also available from a number of accounts.
Note that interest rates payable vary widely, so your local provider may not be offering the best deal but it is now relatively easy to compare the accounts available thanks to various best buy tables. Some children’s accounts are tiered, in that the interest rate paid increases when specified higher balances are reached. In many cases the highest interest rates are paid on those accounts which require savings to be deposited every month.
Given that younger children especially will probably need to visit a branch to pay in pocket money and make withdrawals, the choice of accounts may well be limited to those from a bank or building society that has a branch in the local area. The vast majority of the children’s savings accounts on offer are instant access although there are some that are notice accounts and others that require regular monthly savings.
There are also some accounts that do not permit withdrawals until the saver reaches 18. In some cases the savings may be aimed at a future high value item, such as a car or gap year holiday, and this may determine the appropriate type of account you choose. If it is a longer term fixed rate that you are after then the proximity of the bank or the building society is far less relevant.
Additional facilities such as a cash card are available with some accounts although a minimum age is sometimes specified before a cash card will be issued. At 16 or 18 some of the accounts will also provide a debit card or cheque book.
As far as tax is concerned note that children are also entitled to a personal allowance, which means that in the tax year 2009/2010 they are entitled to have income of up to £6,475 without being subject to income tax. To receive gross interest, ask the building society or bank for an HM Revenue and Customs form R85, although, children’s savings account application forms will often contain or be accompanied by the form as a matter of course.
Note that interest on money given by a parent to a child is only tax free up to £100 a year. If the interest on such parental gifts exceeds £100 for tax purposes it will be treated as belonging to the parent and taxed accordingly.
Some accounts will only permit withdrawals to be made upon the signature of a parent or guardian and this restriction may be useful to instil financial discipline and prevent frivolous spending by the child. Such parental control of the account will almost always apply to children aged under seven but some accounts will permit it to continue until the age of 16.
