Children and Grandchildren
Start them saving from an early age
There are a number of savings accounts and investments designed especially for parents, grandparents and guardians to put away money for children and grandchildren. Banks and building societies offer savings accounts just for children, so it is easy to set up one for them.
Children's savings accounts not only encourage young ones to start the savings habit early, but also give them somewhere to put the cash they receive for birthday and Christmas presents, as well as their pocket money.
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The advantage of children's savings accounts is the interest can be earned tax-free, unlike adult savings accounts which typically have 20% tax deducted on the interest before it's paid.
This is because children are treated by the taxman in exactly the same way as adults. They have an annual tax allowance which is worth the same as an adult's so anything they earn under this is not taxed.
This tax year (2012/13) the annual personal allowance is £8,105. That means they'd have to have an enormous amount of savings - or have an extremely well paid paper round - to be able to earn enough to pay tax.
To avoid paying tax, register your child to receive interest before tax by asking for form R85 at the bank or building society. Before you get too carried away, there is a quirk to watch out for. To stop parents using their children as tax shelters, they have to declare the income from savings if their child earns more than £100 in interest from their savings each year.
However, this only applies to parents and step-parents, not grandparents and other adults.
When a child reaches the age of 16, they're responsible for the tax on their interest payments, so they'll need to fill in their own form R85 (provided their income stays below the personal allowance).
Accounts held in someone else's name should be transferred to them once they reach this age - otherwise the bank or building society will immediately have to start deducting tax from the interest.
There is another way children can benefit from tax-free savings. Children or grandchildren also have an annual tax-free allowance through Junior Isas. Just like adults, children get a tax wrapper in the form of the Jisa, which allows them to protect up to £3,600 from the taxman.
However, not all children can benefit from a Jisa. If they were born between 1 September 2002 and 2 January 2011 and a Child Trust Fund (CTF) was opened in their name, then they are not allowed to hold a Jisa.
The CTF was a long-term tax-free savings account which benefited from a £50 to £250 government investment depending on when the child was born. Children qualified for the account if their parent was paid child benefit for that particular child for at least one day before 4 January 2011.
As a parent or grandparent, you can also take out National Savings and Investments (NS&I) index-linked savings certificates on behalf of the child. You can invest from £100 to £15,000 for three or five years in the certificates and all of your savings will be protected by the government. (This beats the £85,000 you are usually protected for in other savings accounts through the Financial Services Compensation Scheme.)
This saving option is particularly good because the value of the money held in the certificate is guaranteed to stay ahead of inflation when held for at least a year. However, the certificates are not always available so keep an eye on the NS&I site for new launches.
In addition to the index-linked savings certificate, you can also buy a NS&I premium bond for your offspring or grandchild. Anyone, including a child, can own between £100 and £30,000 worth of premium bonds. Interest is not paid on the bonds, but each has a number which is entered in a prize draw every month and prizes - including a £1 million jackpot - are tax-free.
The example below shows how much you could save by paying in a regular amount each month into a child's savings account. This assumes the interest rate stays the same over the period, which in reality wouldn't happen, and you would need to move your savings to a better paying account if one came along.
If you open a children's savings account earning 3% and you start with an initial deposit of £500.
Saving just £50 per month and assuming the interest rate remains the same, the size of your nest egg will be:
- £3,816.65 in five years
- £7,661.55 in ten years
- £13,092.12 in 16 years after which the child becomes responsible for their account.
Saving £100 per month and assuming the interest rate remains the same, the size of your nest egg will be:
- £7,053.66 in five years.
- £14,651.15 in ten years
- £25,381.89 in 16 years after which the child becomes responsible for their account.
- Children can earn interest tax-free
- There are many different savings options for children
- Junior Isas have replaced Child Trust Funds
Children also have an annual tax-free Isa allowance - use it or lose it