Martin Lewis' kids' savings masterclass

Christmas is fast approaching, and instead of piling present after present many parents and especially grandparents are switching to giving cold hard cash. So our Money Saving Expert Martin Lewis is here with a kid's savings masterclass - running through the best ways to save for your child’s future.

The key when it comes to saving for children, is to get them involved as early as possible. Everyone knows I’m a big fan of financial education for kids – not only in teaching them how to save, but importantly where to save to get the most from their money. So if they’re old enough, sit down with them, and pick the savings account together, running through the pros and cons of each. Turn it into a fun financial game.

Ok, so where are the best-paying children’s savings accounts?

The big winner is the branch-only Halifax Regular Saver, which pays 4% AER fixed for a year, though you can only pay in between £10 and £100 per month, and can’t withdraw any money until the year’s up. The Saffron Building Society also has a similar regular savings account paying 4% too, which you can open in branch or by post, and you can withdraw from it whenever penalty-free. After a year, the rates on both accounts will drop, so get your child to set a diary reminder and move their money to a better account when it does.

What about if it’s a bigger lump sum?

There are a number of accounts that let you put in big money for the little‘uns in one go. Then some allow them to take it out whenever they need (you may not want them to have such flexibility).

The top payer is the Santander 123 mini current account at 3% interest on between £300- £2,000 in it. Any child over 11 can open this and they get a debit card to use in shops. However, if they’re younger, you’ll need to open it for them, and for that you’ll need your own Santander current account.

Next top alternative is HSBC’s My Savings account paying 2.75% AER on up to £3,000. Any child aged over 7 can manage this on their own (though all under 16s need a parent with them when opening it – not grandparent, which is worth thinking about).

For larger sums, then Nationwide’s Smart Limited Access account pays 2.25% AER on savings up to £50,000, though it only allows you to withdraw cash once a year

As the rate on these accounts are variable, the rate could drop at anytime. So with older children, turn this into a game, by giving them the responsibility to check the rate and see if they can earn more elsewhere to get a better rate.

Are there any accounts grandparents can open?

For younger children, an adult – needs to open the account on the child’s behalf and be a trustee or signatory (children don’t usually need to be present but you’ll need ID for them, such as a passport). Your name will then be on the account with the child’s but it’ll be your signature that controls it, not theirs. Some accounts are parents only, but grandparents can do this with the Santander, Halifax and Nationwide accounts.

What about Junior ISAs (JISAs) – should I open one of these?

JISAs are special savings (or investment) tax-free accounts, and in last week’s autumn statement the new Chancellor Phillip Hammond said that from next April the amount you can save in it is going up from £4,080 to £4,128 in it per tax-year.

Crucially in these the money is locked away until your child’s 18th birthday (after that though it’s there’s to do what they want with).

If children are roughly aged 5 to 14 then they would’ve got a Child Trust Fund (CTF) instead and the Government may’ve added up to £500 to it. Any younger or older then they’re eligible for a Junior ISA (JISA) though no cash is added to it. As CTF’s are now defunct products, they don’t offer the best rates, so best is to transfer it into a JISA. To transfer it just apply for a JISA then fill in the transfer forms, so it’s a no brainer.

And if you’ve got a JISA don’t think you’re locked in with a provider. You can transfer it to a new provider, just open it and fill out their transfer forms. The best-paying JISAs for savings come from Coventry Building Society which pays 3.25% AER variable. The next best is Nationwide paying 3%.

But aren’t kids’ savings tax-free anyway?

No. Children pay tax just like adults, and like adults, if their total income including from savings is under £17,000 a year then no tax is taken – this is made up of the £11,000 personal allowance, £5,000 starting rate for savings and an additional £1,000 personal savings allowance. But the only difference is that most children don’t earn close to £17,000 – so their savings interest is tax free.

Yet this doesn’t mean parents can stash their own savings in their kid’s name, to prevent paying tax.

There is a rule that says kids’ can only earn £100 interest a year (so that’s about £4,400 saved in the top easy-access account) from money given by each parent. Above that it’s counted as the parents’ income and taxed at their rate – though as most parents don’t pay tax on savings any more either (unless they’re higher rate taxpayer or have a shed load) that isn’t such an issue.

So is there any point in a Junior ISA?

For most people no, just go for the highest interest account regardless. The exceptions are:

- You want the cash to be locked away until your child is 18.

- You’re going to give your child enough money that they go over the £100-a-year interest threshold, in which case these tax-free savings accounts stop that.

- They’ll save enough cash over the years that they’d have more than the £15,480 adult cash ISA limit when they hit 18 (though it’s rising to £20,000 from next April), as when that happens the money automatically converts into an adult cash ISA.

- Your child will earn more than £16,000 in savings interest and income in the tax year and earn more than their £1,000 personal savings allowance and will pay tax.

What about savings for grown ups?

For that, tonight on ITV at 8pm the Martin Lewis Money Show is on ‘Savings in Crisis’ which will show you how to make up to 5% interest.