Martin Lewis: Where to invest the kids' hard cash presents
First, discuss with children whether the cash is for spending or saving. Usually a mix of both is the best answer – allow them to spend some now – while putting some aside for the future.
And that discussion is important. Getting cash gifts is a great opportunity to start some financial education. So if they’re old enough, sit down with them and pick the savings account together.
Explain to them that interest is the price of money. When you save with a bank, you’re in fact lending it to them, so it can lend it out to others. Therefore you want the best price – the highest interest – for doing so.
The top paying children’s savings accounts
The www.halifax.co.uk Kids’ Regular Saver pays 4.5 per cent AER fixed for a year. You can pay in between £10 and £100 per month, and can’t withdraw any money until the year is up. While it can be opened online, once open, you can only access the cash via a branch. After a year, the rate drops, so get your child to set a diary reminder and move their money to a better account when it does.
If you want to put in a lump sum, if they’re aged 11 or over, the www.santander.co.uk 123 Mini account pays 3 per cent on £300-£2,000 and gives a debit card to use in shops. However, if they’re younger, you’ll need to open it for them, and for that you must have your own Santander current account.
There’s also the www.hsbc.co.uk My Savings account which pays 2.75 per cent AER on up to £3,000 and the www.nationwide.co.uk Smart Limited Access account pays 2.5 per cent AER on savings up to £50,000, though it only allows you to withdraw cash once a year (make more and the rate drops to 0.25 per cent).
As the rate on these accounts are variable, it can move at any time. 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. For a full breakdown of accounts see www.mse.me/childrenssavings.
The top accounts with cards so they can spend
The www.hsbc.co.uk account above also allows access to a debit card with a separate current account from age 11 called MyAccount. Or www.tsb.co.uk under-19s account pays 2.5 per cent on balances up to £2,500 and gives either a cash card or a debit card from age 11.
There are also prepaid cards available (for kids aged over eight), which often offer extra functions, but you have to pay. www.nimbl.com is £15 per year, www.osper.com is £2.50 per child per month (so £30 a year) and www.gohenry.co.uk is £2.99 per child per month (so £36 a year). All three cards allow you to spend in shops (though rightly prohibit spending in places primarily for gambling or alcohol) and withdraw cash from ATMs for free (capped at one per month with Nimbl).
Can grandparents open the account?
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 also do this with the Santander, Halifax and Nationwide accounts.
Junior ISAs allow you to lock cash away until they are 18
Junior ISAs (JISAs) are special savings or investment accounts, that you can save a set amount in each tax year: this year it’s £4,128. Crucially in these the money is locked away until your child’s 18th birthday, and from that point on it is their money to do with as they will (so if you’re doing it for university savings, be aware they could choose to spend it travelling the world).
The interest on junior cash ISAs is tax-free. Yet like adults, children can earn £11,500 a year before paying tax, but unlike adults most don’t have any income from working, unless your children have enormous savings, their money isn’t taxed anyway, so there’s no gain.
There is a rule that says kids’ can only earn £100 interest a year (equivalent to about £4,000 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. When they were launched the big sell of Junior ISAs was as a work-around for this rule.
Yet since then savings tax has changed, so that basic-rate taxpayers can now earn £1,000 interest a year without paying tax (higher rate £500). So most parents don’t pay tax on savings either, so for all but the richest, that gain has gone.
The top-paying JISA cash accounts are the www.coventrybuildingsociety.co.uk and www.nationwide.co.uk both paying 3.25 per cent, followed by www.tescobank.com paying 3.15 per cent. If yours is a savings not an investment one and it pays less, you can transfer it into these. For full best buys see www.mse.me/juniorisa.
If you’ve got an old Child Trust Fund you’d likely be best to transfer it to a JISA
Children aged 6-15 may still have a Child Trust Fund (CTF), which were opened automatically by the government. If you’ve still got one and it’s the savings not the stocks and shares version it’s likely to be paying rubbish interest, and you’re allowed to transfer to a Junior ISA that pays more. To transfer it just apply for a JISA then fill in the transfer forms, so for most it’s a no brainer. For more info see www.mse.me/childtrustfunds.
Martin Lewis is the founder and chair of MoneySavingExpert.com. To join the 12 million people who get his free Money Tips weekly email, go to www.moneysavingexpert.com/latesttip