The best child savings accounts in the market and what to watch out for

Teaching your children to save money is a good habit that can really pay off in the long run. It can be easy to instil the sense of value of money through junior savings accounts, which unlike adult savings accounts, can pay some nice interest.

There’s a catch though.

Junior savings accounts are usually used by banks to entice people in with this high (comparatively vs adult savings accounts) interest rate knowing that the majority of people forgot about an account once they’ve opened it and don’t switch. The restrictions placed are then usually designed to minimise the interest paid by the banks.

Here are a few things to check before opening a savings account for your child.

Is the rate fixed or variable

A fixed rate means that you’re guaranteed that rate and the banks can’t change it. A variable rate on the other hand can be changed at any time by the bank (providing they give you enough notice).

Fixed rate accounts are rare but you can find them for short periods of time (e.g. the rate is fixed for one year). An example of this is the Barclays Children’s regular saver that pays 3.50% interest for one year. This account though has a maximum contribution of £100 a month and so over the 12 months you actually only earn about £23 of interest. This type of “teaser rate” is sometimes used by banks to draw customers in with a rate that looks great on paper but isn’t actually as good as it sounds.

Does the rate drop depending on the balance?

Some banks have different interest rates depending on the balance. Some examples of this are the Lloyds Child Saver, Halifax Kids’ Saver and the Barclays Children’s Savings account. With these three accounts, the interest drops to 0.01% on balances above £5k (or £10k for the Barclays Children’s Savings account).

Taking the example of Halifax or Lloyds (who pay 1.45% on balances less than £5k and 0.01% on balances above £5k) shows that for a parent who contributes £50 a month from the day they’re child is born, the rate drops to 0.01% before the child’s 8th birthday. That becomes the 5th birthday if the parent contributes £100 a month. By then, in most cases, the parent has forgotten about that restriction and ends up building up a large pot of savings for their child earning 0.01% interest (and getting eroded by inflation). If you use one of these accounts make sure you don’t get caught out by it.

Can I withdraw as many times as I want

In most cases the answer to this is Yes, however the Nationwide future saver only allows one withdrawal per year. Any more than that and the rate drops to 0.05% for that period. If you’re likely to make regular withdrawals, this is unlikely to be the right account for you.

With all this in mind, the table below compares children’s savings accounts from some of the better known high street banks and building societies.

Other things to note about savings accounts:

• The money is in the child’s name meaning that it legally belongs to them and can only be spent on things that benefit them.
• At the age of 18 the child gets full access to spend the money as they wish.
• Grandparents can also open child savings accounts for their grandchildren providing they have proof of identity (like a birth certificate)
• Anyone can contribute to a child savings account
• If the money contributed is from a parent and the interest in any given tax year exceeds £100 (£200 if the money is contributed from two parents) then the interest is taxed as if it belonged to the parents.

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Disclaimer:

This article should not be read as personal financial advice. Individual investors should make their own decisions or seek independent advice. Please note that tax treatment depends on the individual circumstances or each client and may be subject to changes in the future.