Kids' savings masterclass

IT’S nearly Christmas. And instead of piling up present after present, many parents - and especially grandparents - are switching to opening savings accounts for the little ''uns and giving cold hard cash instead. So I want to give you a kid’s savings masterclass - the best ways to save for your child or their future. Before I start though, a thought. Don’t do this all for children. Instead do it with them, get them involved as early impossible. Everyone knows I’ve campaigned for years to get financial education taught in schools, but it can be taught at home too.

It’s not just about saving, but also 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. And make them responsible for monitoring the rate afterwards in case it drops, and you need to ditch and switch.

What are the best-paying children’s savings accounts?

The Halifax.co.uk Kids’ Regular Saver pays 4 per cent AER fixed for a year, but you can only pay in between £10 and £100 per month, and can’t withdraw any money until the year’s up. The SaffronBS.co.uk’s Children’s Regular Saver is similar and lets you withdraw from it whenever you want.

After a year, the rates on both accounts will drop, so get your child to set a diary reminder to move their money to a better account when it does.

I need to save a lump sum though?

The regular savings accounts don’t suit if you want to put in a stash of cash in one go.

- The top payer is the Santander.co.uk 123 Mini current account at 3 per cent interest on between £300- £2,000. 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 you can only do that if you’ve your own Santander current account.

- Alternatively, HSBC.co.uk’s My Savings account pays 2.75 per cent AER on up to £3,000. Any child aged over 7 can manage this on their own.

- For larger sums, the Nationwide.co.uk Smart Limited Access account pays 2.25 per cent AER on savings up to £50,000, though it only allows you to withdraw cash once a year.

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 investments) that let you save £4,080 with tax-free interest for under 18s.

The money is locked away until your child’s 18th birthday. After that though, it’s theirs to do what they want with – so if you’re thinking it’s a ‘uni fund’, they may prefer to spend it on a car, a holiday, or following One Direction round the world.

If you’ve got a JISA already, check its rate. If it’s poor, you’re not locked in, 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 CoventryBuildingSociety.co.uk, which pays 3.25 per cent AER variable. The next best is Nationwide.co.uk paying 3 per cent.

My children have a Child Trust Fund instead?

Children currently aged roughly aged five to 14 got a Child Trust Fund (CTF) instead of a Junior ISA. These are now defunct products, they don’t offer the best rates, yet since 2015 you’ve been allowed to transfer these into a Junior ISA. Just follow the ‘how to transfer’ info above.

Aren’t kids’ savings tax-free anyway?

No. Children pay tax just like adults. Yet unlike most adults they don’t earn from work, if they have any income it’s only from savings. And if anyone, child or adult, only has savings interest and has 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.)

To put that in perspective, to earn £17,000 in savings interest in the top accounts, you’d need over £1,000,000 saved.

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

So is there any point in a Junior ISA?

For most people no, unless it’s paying higher interest than standard savings. Yet there are some exceptions…

- 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). 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.

n Martin Lewis is the Founder and Chair of Money Saving Expert. To join the 11 million people who get his Martin’s Money Tips weekly email, go to moneysavingexpert.com/latesttip. What The Martin Lewis Money Show on ITV Mondays at 8pm.