Opening a savings account for your child or grandchild is a no-brainer, but choosing the right one is no easy feat.
Many banks and building societies offer accounts under names such as Junior, Child or Young Saver.
But they have very different uses – and tax consequences – which can be confusing for adults trying to choose one.
Some are designed to help teach children to save their pocket money, while others are intended for parents and grandparents to set aside larger sums for younger ones.
Confusing: A lot of banks and building societies offer accounts, under names like Junior, Child or Young Saver, but they have very different uses and tax consequences.
When choosing an account, one of the first things to consider is taxes. If a child saves a small amount of money every so often, taxes should not be an issue.
But HMRC says that if a child earns more than £100 in interest for a parent, this falls under that parent’s tax rate rather than their own.
This means that if, for example, the parent is a higher rate taxpayer and pays 40 per cent tax on their savings, the child will also have to pay 40 per cent tax on any amount they earn above £100.
The rules are designed to prevent parents from putting huge sums of their own money into accounts in their children’s names to save taxes.
Junior Isas are a great way to save tax-free. Children can deposit up to £9,000 a year into these accounts and all interest generated is tax-free.
The downside is that the money cannot be accessed until the child turns 16. However, this could be an advantage as it encourages long-term savings.
Whichever type of account you choose, keep a close eye on fees or you could end up earning a pittance – as little as 1 per cent, as one Money Mail reader discovered.
Gordon Rennie has discovered that the money he and his wife were putting into a Virgin Money Young Saver for their grandchildren is now yielding an insulting 1 per cent.
She was worried that she wouldn’t be able to move the money because it was in a trust for the young people. The good news is that you can move money in those accounts, but the trick is to keep the money in a trust.
If you’re looking for a non-ISA account for a child, then the 4.4 per cent Yorkshire BS One Day account looks like a good option, while another popular account is the Skipton BS Children’s Saver, albeit with a lower rate of 3.55 per cent.
You can make withdrawals for the child’s benefit at any time and switch to another account if the rate drops. Open an account with your new provider and ask your current provider to transfer the money.
Coventry BS pays 5 per cent into its branch-based Young Saver account for children aged between seven and 17. It launched the easy-access account after discovering that among children aged between seven and 11, one in four did not know what a 50p coin looked like.
Yorkshire BS’s overnight account, available by post or in a branch, pays 4.4% less but is open to under-21s. Many other societies, including Swansea, Leeds, Hinckley & Rugby, Newcastle and Newbury, offer similar accounts paying 4% or more.
Nationwide pays 5 percent on its FlexOne Saver card, for kids ages 11 to 17. It comes with a Flexone current account, which is managed online, through its app, over the phone or in a branch.
Among banks, HSBC pays 5 per cent on up to £3,000 in its Kids Savings Account, open to seven to 17-year-olds.
A depressing report by the Social Market Foundation think tank found that only one percent of primary school teachers believe their pupils have adequate financial skills.
Savings accounts are therefore invaluable in preparing children for the future, not only because they provide them with a savings fund, but also because they help them understand how money works.