What’s the difference between children’s and adults’ savings accounts?
Children’s savings accounts are very similar to adults’ savings accounts. You just need to take a few things into account when opening one:
- Who can open the account? Some children’s savings accounts can only be opened by a child’s parent or legal guardian.
- Age limits. Different financial institutions have different criteria: some may allow you to open an account for any child aged under 18, other apply more restrictive rules.
- Interest rates. Good news: they tend to be higher than with adults’ savings accounts.
- When can the money be accessed? Just like with adults’ savings accounts, it depends on the type of account you pick.
What types of children’s savings accounts are available?
Just like with adults’ savings accounts, there are roughly four types of children’s savings accounts you can choose among:
- Regular savings accounts. They offer the best interest rates, but you have to commit to depositing a fixed sum into the account every month. The money can’t be withdrawn until the account expires (often after a year). There is usually a limit on the amount that can be deposited over the course of a year.
- Easy-access savings accounts. Money can be accessed all the time, in return for a lower interest rate.
- Fixed bonds. You deposit a certain sum when you open the account and only get it back when the product expires (usually after 1-5 years). The longer the money is “locked away”, the higher the rate you can expect.
- Junior ISAs. These accounts earn tax-free interest and have to be opened and managed by a parent or legal guardian, but the money belongs to the child and can only be withdrawn when they’re 18. You can only pay up the maximum yearly allowance into a junior ISA, which is £9,000 for 2024/2025.
To choose the most suitable account for your kid, try thinking about the purpose for opening it. For example, if you want to teach them how to save and manage their money, an easy-access account will be better: you can decide a “savings goal” together and when they reach it, they can withdraw the money and use it to buy, say, that new video game they wanted. If you’re just trying to set aside some money for your kids’ university years instead, a Junior ISA or a fixed bond may be more suitable.
It can sometimes be a good idea to think beyond traditional options for children’s savings. Junior stocks and shares ISAs let you invest with the money you have paid in. You can either choose to use robo-advisors which have a selection of ready-made portfolios or opt for a DIY approach where you’d pick out the individual investments for the portfolio. Just remember that the tax-free allowance is £9,000 in each tax year and all the money paid in belongs to the child and can’t be accessed until they turn 18. Learn more about Junior stocks and shares ISAs.
Four lessons your children can learn from having a savings account
- Learn about budgeting. This one is obvious. Opening an account and having a fixed amount coming in and out of it teaches children about the basics of budgeting.
- See the value of saving. Most children have their sights set on new toys, video games, and accessories. If you set them up with an account, and drip pocket-money into the account – they’ll soon realise the value of saving. You might need to point it out, but you’d be surprised how many kids are naturally inclined to save, and become pretty determined to reach their goal!
- Understand interest… A regular piggy bank just sees the money sit there. A real bank is actually borrowing your money – and they’ll pay you for it! This is the basic explanation of interest that it’s important to grasp from a young age.
- …and how your money can work for you. Linked to interest is the idea that money can work for you. If a child is taught the basics of budgeting, saving, and understanding interest (as well as other tips and tricks!) they will really push their money and put it to good use.
Children’s savings accounts and tax
In most cases, children don’t have to pay taxes on the interest they earn on their savings accounts – that’s because they don’t earn any money. However, taxes will apply if:
- They earn more than their personal allowance. Say, from a fund in their name. The personal tax allowance for 2021-20 is £12,570.
- They earn more than £100 a year in interest from money given by their parents or legal guardians. The thinking behind this is to stop parents, guardians or step-parents using their kids as a tax-free extra allowance. This rule doesn’t apply if the money is given by another relative or a friend.
How can I open a child savings account?
Any parent or guardian can open up a child’s savings account or a Junior ISA. Individual providers may vary when it comes to an adult who is neither the parent or guardian trying to set up the account, so you’ll have to check that out.
Otherwise it’s as simple as opening up any normal savings account: you’ll basically need your personal details and a proof of ID.
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