Martin Lewis gives his top tips on teaching your children how to save from an early age.
Children’s savings are the gift that keeps on giving. But our Money Saving Expert Martin Lewis says don’t just give your children cash, teach them how to get the best rates too.
What are the top paying children’s savings accounts?
Pay in £10-£100 a month and Halifax Kids' Regular Saver pays 6% fixed AER for a year, providing you make no withdrawals. You can apply in Halifax branches.
If you want to put cash away in your kids’ name – locked up - the Halifax Kids’ Fixed Saver pays 3%-3.2% AER fixed for 3-5 years, with a minimum deposit of £500. Withdrawals aren’t allowed and if you close the account early, you’ll be subject to a penalty of up to 365 days interest.
If you just want to save a lump sum so your child can withdraw it at any time, Virgin's Little Rock account pays a variable 3% AER - a great lesson in rate monitoring and switching if it drops.
What are the top junior ISA and child trust funds?
Under-18s born before 1 September 2002 or after 3 January 2011 can save £3,600 a year in junior ISAs. The current top payer is Coventry Building Society, giving a variable 3.25% AER. You can also choose to invest the money in various stock market funds in the hope of greater growth, but at greater risk.
Other under-18s, who were born outside of these dates, still have to use the child trust funds they opened with the government’s £250 voucher. They can transfer and add £3,600 per tax year in cash to Furness Building Society paying 3.05% AER.
What to choose - kids' savings v junior ISAs?
Unless they earn over £8,105 a year, kids don’t pay tax, limiting the tax-free benefit of saving in junior ISAs. In which case go for the highest rate regardless of whether it’s a children’s savings account or a junior ISA. However, there are two exceptions:
1) If money is a gift from parents (not grandpa, aunty, etc) and earns £100 or more a year interest, then it is taxed at the parent’s tax rate – the only way to stop this is to put it in a junior ISA.
2) At 18, junior ISAs turn into normal ISAs, so if your child will have big savings then, more than enough to fill an adult ISA (£5,640) then putting it in a junior ISA now means it’ll stay tax-free then.
Are you saving for their 'university fund'?
If cash is in their name, remember it's theirs, not yours. For example at 18, they can spend junior ISA cash on a boozy holiday if they choose – so if you’re putting the money away for a set purpose, you need to know if they disagree, they win.
Plus beware of paying tuition fees upfront – many students won’t need to repay anything near to the cost of their tuition so you could potentially be throwing thousands down the drain. Under the current student loans system repayment only starts on earnings of £21,000 or more after graduation. Earn any less, and there’s no need to repay and after 30 years, the amount owed is wiped. So paying for them may not be the gift you think it is. You’d often be better saving up for a mortgage deposit instead.