Contributing to a child’s financial future is probably the best gift you can give, especially in this harsh economic climate where young people without savings struggle to afford their own homes and education. Setting up a children’s savings account is the easiest thing in the world and even if you can only afford a few pounds a week, after a few years those pounds will have turned into a lump sum that will help your child get off to the best start.
Children’s Savings Account Vs Junior ISA
Whilst teaching children to save is a great idea, how can you ensure that they get the most out of their meagre savings? If your child didn’t qualify for the Child Trust Fund then there are two options open to them, either a children’s savings account or a children’s ISA.
Children’s savings accounts can give a very good rate of interest but only if you fulfil the terms and conditions set which can be very inflexible. For instance some of the high paying accounts request that you:
– Already have an account with them
– Deposit a minimum amount each month
– Limited withdrawals (if any at all)
– No missed payments
– Savings are taxed according to the same rules as adult savings
– Some low interest accounts try to lure children with freebies
Interest rates can be variable or fixed but be warned that fixed rate accounts tie you in with that provider for the rest of your fixed term as there will be penalties for leaving early which could well negate any interest accumulated over the year. Penalties for withdrawals or missing payments are usually to downgrade the interest rate to a much lower one.
Children’s ISAs on the other hand offer the flexibility of when and how much to save but they don’t allow for withdrawals. Here are the pros and cons of a children’s ISA:
– Accounts can be opened with as little as £1
– Both regular and one-off payments permitted
– Savings and interest accumulated are tax free
– You can save up to £3,600 each tax year
– The money is fixed until they are 18
– You can choose from a cash ISA, Investment ISA or a bit of both
– When your child reaches 16 they can have both a Junior and an Adult ISA, doubling their savings for two years at least.
The only real downside to Children’s ISAs is that the money is not released to the child until they reach the age of 18 when the account is legally transferred to their name and they can either choose to spend it or keep it as an adult ISA. As the money is legally theirs, you as the parent have no say in what they spend it on. Money will be released early upon the death or critical illness of a child.
Some accounts mature at the age of 16 when the money is then automatically transferred into an adult account but your child can still apply for a Children’s ISA until they reach the age of 18 so it’s possible to benefit from both for two years.
The main advantages of ISAs are that they are tax-free and pretty flexible with deposits. Even if you stop paying into the account, the amount accumulated will keep on earning interest year after year and let’s face it, not being able to access the money does have its advantages as it means that you won’t be tempted to dip into it to buy them that brand new X-Box.
If the account is not performing as well as others on the market then you can transfer quickly and easily, thus ensuring that you are always getting the best deal available. The same goes for Investment accounts and in fact you can even transfer money from a Cash ISA to an Investment ISA and vice versa so there are many ways in which you can make even the smallest amount grow into a substantial sum.
Parents, grandparents, aunts, uncles and even friends can all contribute to your child’s savings and so it becomes a useful place to stash birthday and Christmas money and if you can afford to pay just a few pounds a week into the account then it’s worth doing so.
There are many different products out there to choose from but generally most Cash ISAs operate in exactly the same way, only the interest rate changes. Most offer variable rates paid annually every tax year but some will offer bonuses for top amounts or fixed bonuses for set periods of time. The best way to compare is to use a comparison website which should give you updated information on current offers.
Remember, it’s never too late to start saving for your child, just make sure you find a provider that offers a generous interest rate. After all, money in piggy banks doesn’t grow but money in banks will.