What are the best ways to save for your children?
Last week the new tax year started, with big changes to savings for grown-ups. Yet last week during the phone-in, we were swamped with questions about the best savings for little’uns too. So our Money Saving Expert Martin Lewis is here with a children’s savings masterclass – including the new junior ISA allowance and personal savings allowance.
Simple question, where’s the best place to save for children?Let’s focus on rate for the moment, as for most children that’s the right move. It’s really good if children are old enough to go through the process of choosing and opening their account with you, as it’s a great financial preparation for later life. Make sure you explain that “interest is the cost of money. So, when you save in a bank you’re actually lending it your money – and it should pay you for that. The higher the interest the more you are being paid.”
- Top for rate: The Halifax Children’s Regular Saver account, which pays a massive 6% AER fixed for a year. You can’t put lump sums in it, you have to pay in £10 to £100 a month, and you can’t withdraw from it until the 12 months are up.
- Top for lump sums: The Nationwide Smart Limited Access account pays 3% AER variable on savings between £1 and £50,000, though it only allows you to withdraw cash once a year. If you want unlimited access then HSBC’s My Savings account also pays 3% AER but you can only save up to £3,000.
Once the money’s in, if they’re old enough, give your children the job of checking if the rate has dropped. It’s the parent (or sometimes grandparent) who can open these on the kid’s behalf, and the child can often manage the money themselves from age seven.
Can children take money out of cash machines with these?
No, the top for cash cards is the Halifax Young Saver account, which comes with a cash card for children over seven to take money out of ATMs, and pays a still decent 2.25% rate compared with the accounts above.
If you want an account with a debit card so they can spend online or in shops from it, they can usually do this from age 11. The best-paying account that does so is Santander’s 123 Mini account, paying 3% AER on £300 to £2,000.
What about junior ISAs – isn’t there a new allowance for these?
Each year anyone under the age of 18 can save or invest totally tax-free in a junior ISA (JISA). The new tax year started last week so that means there’s a new allowance of up to £4,080 for saving in a junior ISA. However, the money in this is locked away until their 18th birthday and on that day they can use it for whatever they choose.
If the child was born between September 2002 and January 2011, they’ll have a Child Trust Fund (CTF), which works exactly the same way – and frankly as junior ISAs pay more and you can now transfer CTFs into junior ISAs, you may as well do so.
The top-paying JISAs are Coventry Building Society’s and Nationwide’s, which pay 3.25% AER variable – so monitor the rate in case it drops.
Last week you said most people can earn £1,000 interest a year without paying tax on it anyway – do kids get this? If so, is there a point in Junior ISAs?
Some think kids don’t pay tax anyway. Actually they pay tax just like adults. And so they get the new personal savings allowance too – which means all savings interest is now paid tax-free, and basic-rate taxpayers can earn up to £1,000 interest a year tax-free (higher-rate £500).
Yet, in fact most children don’t have any income other than savings interest. In which case they can actually earn up to £17,000 a year of interest on savings without paying tax on it (it’s complex as to why, but in a nutshell it’s the normal tax-free income allowance of £11,000 + a little known one for those on low incomes called the starting savings rate of £5,000 + the new personal savings allowance of £1,000).
So, in many cases the JISA is pointless. And as you can get higher rates and more flexibility elsewhere, then for most, why bother?
Yet there are two reasons why some consider doing it…
To prevent parents stashing their savings in their kid’s name, there is a rule that says kids can only earn £100 interest a year from money given by each parent or step-parent (not grandparents or relatives). Above that and it’s counted as the parents’ income and all of it is taxed at their rate. This isn’t a problem unless the parents earn more interest than their own personal savings allowance, in which case it would be taxed at their rate. In this case a JISA would protect it from the tax.
If you want to lock the cash away until the child is 18, it’s a good way to do it.