Choosing a bank account for your child
Setting up a bank account for your child can be a great way of introducing them to the world of money, more specifically, the world of saving.
Besides, an account is a great way of showing how compound interest can make savings, even at a modest rate of interest, grow substantially over the long term.
The good news about kids’ savings accounts is that interest rates tend to be a bit higher than those for adults.
So, having decided your child needs an account, what are the options?
You can set up an account in a child’s name whatever the child’s age, so long as an adult is available to administer it and withdraw and deposit money. And you can usually start with a tiny deposit, even as little £1.
What kind of account?
The types of account available to you are pretty much the same as for adults; which you choose will depend on how you intend for the account to be used.
Many of them come with modest free gifts, such as a money box.
As the name suggests, this type of account allows quick and easy access to cash with no need for notice. They are simple to open and you can start with a tiny deposit.
The downside is that the interest they pay is likely to be minimal.
Notice period accounts
These leave your child’s money locked up for a set period and to get at it you'll need to give a notice of varying length, according to the specific account will need to be given.
If withdrawals are made without giving the right amount of notice, interest on the amount withdrawn will be lost.
The advantage with these accounts is that, because of the notice period, the interest tends to be a little higher.
The downside is that with an account like this, perhaps with a three-month notice period, your child is unlikely to be involved with the account. It would certainly teach them to plan ahead, but not be much use if they want to withdraw cash at short notice to buy a birthday present, or similar.
Fixed rates or time deposits
These are where you lock up a sum of money for a specific time, usually anything between one and five years. While you’ll generally get a better rate of interest in exchange for tying up your money, your child won’t be involved at all in day to day money matters with such an account.
A junior ISA isn’t going to create much excitement in the short or medium term, but if only building a little nest egg for the years ahead is your objective for your child, then they can work well. But your child can’t access this money until they’re 18, so they won’t learn much about saving and spending in the meantime.
Even so, a Junior ISA will allow your child to save up to £4,128 a year (the amount will go up each year as set in the budget), and by the time they’re 18, this can build into a significant sum.
Perhaps you feel like introducing your child to the world of high finance, in which case a stocks and shares ISA might be appropriate. Obviously, the value of these can fluctuate quite wildly, but the potential returns over the long term will normally beat cash savings hands down … the key phrase there, though, is ‘over the long term.’
These are accounts that specify a minimum amount your child must save each month and they often pay good rates of interest.
The plus side to these accounts is that they do encourage a savings habit.
What about tax?
When it comes to HMRC, your child is treated the same way as an adult. If he or she earns enough, the tax man will come a knocking.
However, just like an adult, your child is entitled to earn £11,500 before paying tax, so, unless they’ve got a very large paper round, their earnings will be tax free.
For more hints and tips on how to manage your money, check out our money guides.
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