Are Junior Savings Accounts Worth It?
There's no denying that having children comes at a cost, and as your children grow older, encouraging them to save money and not rely on the Bank of Mum and Dad indefinitely is an important life lesson.
A good way to kick off this positive money-saving habit is to give them a piggy bank at a young age and as they get older, arrange for them to have their own bank account.
Opening a children’s saving account when they’re younger and encouraging them to squirrel away some of their pocket money to save up for something special is a great way to teach your child how to be financially responsible, and in addition to teaching your child (or grandchild) to save, there are many advantages gained by investing in savings for children. For example, you don’t usually have to pay tax on children’s savings.
There’s a mind-boggling abundance of children’s savings accounts and investment options to choose from online and this article aims to furnish you with all the information you need to find the very best child saving plan for you and your loved ones.
What is a junior savings account and how does it work?
A junior savings account is a type of savings account specifically designed for the benefit of children.
An adult can open a bank account in a child’s name with a view to the child taking over responsibility for the account when they’re old enough (not before the age of 7).
Certain instant or easy access savings accounts for older children have low-interest rates but allow you or your child to deposit or quickly withdraw money at any time.
Regular savings accounts typically earn a higher rate of interest than instant or easy access accounts, but you should avoid withdrawing funds for a set amount of time (usually a year) otherwise the interest will diminish.
Can I open an account for my grandchild?
Yes, you can open a savings account for your grandchild in their name, but you will need to provide certain documentation like a birth certificate to do so. You can also purchase premium bonds for your grandchildren (see below).
However, a grandparent cannot open a Junior ISA for their grandchild, but they are able to contribute to one set up by a parent.
The great news is that unlike parents, grandparents saving for grandchildren will never have to pay tax on any accrued savings account interest providing their grandchild doesn’t exceed their personal allowance.
When investing for grandchildren, to ensure no tax is paid, a grandparent can complete and submit a R85 form to the bank or building society account provider.
How to choose the right child's savings account
Before comparing and searching for the best junior savings accounts online, you should carefully consider all the different children’s investment options and choices.
Types of children's savings accounts
Instant/Easy Access accounts
As outlined above, instant or easy account accounts mean you or your child can easily deposit or withdraw money at any time without having to wait long or at all.
This type of savings for a child is a good option if your child wants to save their pocket money for a special purchase or a rainy day, but wants to be able to access their money instantly or quickly.
The only downside is interest rates are low on these types of accounts and are currently at an all-time low, meaning that any interest accrued is likely to be nominal.
Regular savings accounts
Unlike easy-access or instant bank accounts, regular savings accounts have limited access and require monthly deposits.
Because of these restrictions, the interest is usually fixed and at a higher rate than you get with easy access accounts. However, some regular accounts have a variable [unfixed] rate, so be mindful of this when choosing a regular account.
Junior Cash ISAs or Junior Stocks and Shares ISAs
A Junior ISA is a great way of saving for kids in readiness for their adult future as even though a parent or guardian must open the account, the money belongs to a child who can only access the funds at the age of 18.
If you have savings languishing in a Child Trust Fund, you can transfer the money to a tax-free Junior ISA to get a much better return on your investment.
Every child is entitled to save up to £9,000 in 2021/22 and you can choose to split these funds between a junior cash ISA and stocks and shares ISA if you wish.
A junior stocks and shares ISA allows you to purchase shares, bonds or other permitted investments and is more ‘risky’ than a cash ISA as investments can decrease in value (or, on the flipside, increase).
Child Trust Fund
Child Trust Funds were introduced in 2005 as bank accounts for babies who would be able to access the funds as adults once they turn 18.
The UK government anticipated that a tax-free savings account for a newborn baby would encourage and help parents, guardians, family members and the children themselves, save a nest egg for their future.
Any child lucky enough to be born between 1 September 2002 and 2 January 2011 was entitled to a tax-free Child Trust Fund into which the government paid a contribution of £250 (or £500 for families on a lower income).
Child Trust Funds are no longer available and have been replaced by tax-free Junior ISAs and sadly, the government does not make any contribution to these.
Any existing Child Trust Funds can be transferred to a tax-free Junior ISA where they’ll typically increase in value and when a child turns 18, they can either withdraw the cash or keep the investment by transferring it to an adult ISA.
If you have misplaced the paperwork for your Child’s Trust Fund or are an adult who has recently turned 18 and wants to check if you have one, visit the gov.uk website for details on how to find it.
When you buy NS&I premium bonds, instead of earning interest on your investment, the interest earned is put into a monthly prize draw.
You are entered into this monthly prize draw and can potentially win tax-free cash from £25 up to £1m.
You can buy bonds for a minimum of £25 at the age of 16 or on behalf of a child you are the parent, grandparent, great-grandparent or guardian to, and can continue purchasing bonds up to a maximum value of £50k.
The great thing about NS&I bonds is they are backed by the Treasury and as ‘safe as houses’ so you’re not taking a gamble with your investment and your capital is completely safe; it’s simply the interest that is ‘gambled’.
Investing for children can also include making provisions for their retirement. This may seem a bit OTT and a little odd to some, but at least you can rest assured they’ll be a lot older and wiser when they gain access to the funds.
You can start off a pension for your child that will automatically transfer to them when they turn 18 years old.
You can put aside up to £2,880 tax-free cash every year and receive a further 25% top-up from the government, taking your tax-free investment up to £3,600 a year.