Wednesday, March 25, 2009

How to make the most of your child’s savings

Ask not what you can do for your child but what your child can do for you.

Gone are the days when you could send your child down a mine or up a chimney to help the family finances, but that doesn’t mean they can’t contribute.

In the past, children’s savings accounts have offered fairly poor interest rates. But base rate cuts have whittled away the interest rates on ordinary savings accounts leaving children’s accounts looking very attractive. The average instant-access rate for adults is now 0.97% compared to 1.3% on children’s accounts, according to, while the average rate for children’s regular savings accounts is 2.9% compared to 2% for adults.

When you consider that the interest is usually tax-free, the deal gets better and better.

How does it work?
A children’s savings account works just like an ordinary savings account, except that it is opened for a child. If the child is under seven, then a nominated adult (parent, guardian or grandparent) will have to act as signatory on the account. If the child is over seven, then they can open an account all by themselves. But don’t panic – rather than handing over cash for them to blow on High School Musical memorabilia, you can still set up an account that you are a signatory on until they are 16.

If you are a signatory on an account, then you can withdraw and manage the money. So while it’s their name on the account, you still control it.

What are the tax implications?
These accounts aren’t tax-free as such. Children pay income tax just like adults. But unless you have found a legal form of work for your pint-sized workforce then children will rarely use up their Personal Allowance – the amount they can earn before they have to pay tax – which is currently £6,035, rising to £6,475 on 6th April.

However, if you open an account for your child or step-child and that account earns more than £100 interest a year, then income tax at your own rate will be payable upon it. But this only applies to parents – it doesn’t apply to grandparents or anyone else who wants to put money into a child savings account.

In order to prevent tax being paid on interest payments to a children’s savings account, you will need to fill out an R85 form, which the bank should give you when the account is opened.

Which account should you open?
The best children’s savings account available at the moment is Halifax’s Children’s Regular Saver. This account pays 8% AER fixed for 12 months. As the interest is tax free this equates to a 13.28% return for a higher-rate taxpayer. Such a good deal does come with a couple of catches though.

The maximum deposit is £100 a month and if you miss a monthly payment or withdraw any of the cash before the end of the 12 months, then the account is closed and the money is transferred to a Halifax Save4it account. The interest is then paid entirely based on that account’s rate, which is currently 1.55%.

This account has another significant attraction though. Five adults can open the Halifax account for every child. And you don’t have to be related to the child. So Grandma, Auntie Val, Mum, Dad and even Bob from next door can earn 8% interest tax-free on a proportion of their savings.

If you want an account with fewer restrictions, then Ali Hussain in The Sunday Times suggests the Yorkshire Building Society’s One Day Account. This has the best easy-access rate at the moment, 2.25% on savings above £10. With this account you can make unlimited withdrawals without incurring any penalties. And as long as you stay beneath the limits the money is tax-free. So parents can put up to £4,400 into the account before it starts getting taxed (as that would generate about £99 in interest payments) – just below the £100 limit.

However, you can easily get cash Isas that beat this rate, so unless you’ve already filled up your Isa for this year (and the next tax year is coming up in just a couple of weeks – April 5th is the deadline), this isn’t worth considering.

So put your child to work – march him or her to the nearest bank right now!

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