Children’s savings accounts are offered by a range of providers but there are a few differences that you need to grasp before investing your cash. Here’s what you need to know.
What are children's savings accounts?
Children's savings accounts are financial products specifically designed for young savers under 18. These accounts all offer a safe and simple way for children to start saving money and tend to have standard features such as:
No minimum age requirements
No monthly fees
Competitive interest rates
Parental control: Most children's savings accounts require a parent or legal guardian to open and manage the account on behalf of the child until they reach a certain age, typically 16 or 18.
Limits on withdrawals
How do children's savings accounts work?
Opening a children's savings account on behalf of a child is simple. In nearly all cases, a parent or legal guardian can open one, and while the account will be in the child's name, a parent or guardian will manage the account until the child reaches a certain age.
Parents, family members, or the child themselves can all deposit money into the account, and alongside this, these accounts typically offer an interest rate on the money saved. The interest rate can be fixed or variable and may be higher than a regular savings account to encourage saving.
In most cases, the parent or guardian will manage withdrawals until the child reaches a certain age, typically 16 or 18.
What are the alternatives to traditional kids' savings accounts?
The alternative to children’s savings accounts is a prepaid kid's debit card like GoHenry. With these cards, kids get all the benefits of a debit card and savings pot, while learning how to manage their own money.
With a prepaid debit card, parents can load the cards with pocket money, relatives and grandparents can send money to kids, and your child can set up several saving pots for short and long-term goals.
Why is saving important for kids?
Learning to save as a kid is an important life skill. Saving regularly and avoiding unnecessary spending helps kids to become financially responsible adults. It can also allow them to build financial skills, such as budgeting, goal-setting, and understanding the value of money.
Learning to save and creating a savings buffer will also help them to avoid relying on credit cards or loans and potentially getting into debt when they are older.
Related: What is saving and why is it important for kids?
What are the different types of children’s savings accounts?
Instant access accounts allow you to save and withdraw money at any time, and due to this, they have low-interest rates and a low return. This means that the profit or income earned on the investment will be small or below average.
Regular savings accounts
Regular savings accounts are designed to encourage regular saving, so you have to save money every month. They usually pay a higher interest rate than instant savings and easy-access accounts.
A fixed-rate bond savings account is a good option if you have a lump sum to deposit that you won't need to access for several years. With fixed-rate bonds, your money is locked away, typically for up to five years, and the interest rate won't change from the day you open the account until the end of your agreed fixed term, so you'll know what your return will be.
Premium Bonds are an investment product issued by National Savings and Investment (NS&I). Unlike other investments, where you earn interest, here accounts are entered into a monthly prize draw where you can win between £25 and £1 million tax-free.
Notice accounts are a type of savings account that has no fixed term but requires a notice period (usually 28 to 90 days) before you can withdraw your money. They offer more flexibility than fixed-term accounts and typically pay more interest than easy-access ones.
A Junior ISA (Individual Savings Account) is a long-term and tax-efficient way to grow a pot of money for your child. Any money invested into a Junior ISA belongs to your child – it can't be withdrawn by anyone else. After your child's 18th birthday, their Junior ISA automatically changes into an adult ISA – so they can continue building up their savings without paying income or capital gains tax.
Child Trust Funds
A Child Trust Fund (CTF) was a savings account that parents could open for children born between 1st September 2002 and 2nd January 2011. The Child Trust Fund scheme closed in 2011, but six million Child Trust Funds were opened between those dates, and the first of these are now reaching maturity and are worth, on average, £1000.
A child pension is a savings scheme for a child under 18 by a parent that anyone can pay into. It is a way to save for your child's retirement, has tax relief, and is shielded from capital gains and income tax. However, they have a low annual contribution limit, and your child won't be able to access this nest egg until their retirement.
What are the benefits of a children’s savings account?
There are several benefits to having a children's savings account:
It encourages good saving habits at an early age. By regularly depositing money into the account, kids can learn the value of saving and setting goals.
It teaches financial responsibility. Managing a savings account can help children learn about financial obligations. They can see the impact of their saving habits and understand the importance of making smart financial decisions.
It helps build a nest egg. A children's savings account can help you build a nest egg for their future. By earning interest on their savings, children can watch their money grow over time, helping them save for future expenses such as college or a car.
It provides financial education. A children's savings account can also provide an opportunity for financial education. Parents or guardians can use the account to teach their children about budgeting, goal-setting, and other important financial skills.
It can offer higher interest rates. Another reason your child should have a savings account is that they often offer higher interest rates than standard access and adult savings accounts, which can help children's savings grow faster.
It teaches kids to delay gratification. Learning to save up for things that they want is a key financial lesson that savings accounts help children understand.
Related: Reasons to save for your child
Are there any drawbacks with children’s savings accounts?
Depending on the account you opt for there can be certain drawbacks to a child’s savings account.
Tax implications. Depending on the amount of money in the account and the child's age, there may be some tax implications to consider (for more on this see below).
Access to funds. Depending on the account policies, there may be restrictions on when and how funds can be accessed. For example, some accounts don’t let you withdraw money and may require a parent or guardian to be present to withdraw funds, others need notice for withdrawals. If you are worried about access to the money for you and your child, then a prepaid debit card may be better. These allow you to set up automatic savings that you can withdraw at any time.
Opportunity cost. While a savings account is a safe place to store money, it may not offer the same potential for growth as other investment options. Depending on your goals for the funds, it may be worth considering other investment options with potentially higher returns.
How to open a savings account for a child
Like all accounts, opening a savings account for a child will vary from bank to bank. You will always need proof of the child's identity, which is why many don't allow online applications but prefer in-branch visits.
What is needed to open a savings account for my child?
To open a child's savings account, you will need your child's birth certificate, and if you don't already bank with the provider, you'll also need to bring proof of ID and your address.
When can a child open a children's savings account?
A child can generally have a savings account at any age, but a parent or guardian must open the account.
Can grandparents open savings accounts for grandchildren?
Yes, grandparents can open an account in a grandchild's name. They will need proof of the child's identity, such as their birth certificate.
Related: A guide to savings accounts for your grandchildren
What happens to a children's savings account when they turn 18?
The specific terms and conditions of a children's savings account vary depending on the provider, but typically, the account will undergo a few changes when your child turns 18.
For starters, at 18, they become the legal owner of the account. This means they are solely responsible for managing the account, making deposits, withdrawals, and any associated fees or charges.
Account features will also change. Once the child turns 18, the account may be converted into a regular savings account with different terms and conditions than a kid's saving account.
Depending on the type of children's savings account, the tax implications may change when the child turns 18. For example, if the account were a Junior ISA (Individual Savings Account), it would have allowed you to save £9000 a year for then. This will change to an adult ISA that enables them to save £20,000 a year.
Are children's savings accounts tax-free?
Like adults, children have a tax-free allowance, which is how much income they can earn before paying any tax. This is £12,570 in the 2022-23 tax year and hasn't changed since 2021-22.
If this income is from savings interest, there are extra tax-free allowances in addition to the personal allowance, allowing a child to earn up to £18,570 tax-free in the 2022-23 tax year.
Related: Do under 18s need to pay income tax in the UK?
Do kids pay tax on gifts?
If a parent or grandparent gives a gift to a child, it is generally exempt from Inheritance Tax, regardless of the value of the gift. However, if the gift generates income, such as interest or dividends, the child may be liable to pay tax if it exceeds a certain threshold. If you have given your child money that earns over £100 a year in interest, dividends, rent or any other investment income, the interest will be taxed as if it were yours. This doesn't apply to Junior ISAs, Child Trust Funds and Children's Bonds.
Related: How much money can grandparents gift grandchildren in the UK?
Are there any tax-efficient savings options?
There are several tax-efficient savings options available for children in the UK.
Junior ISAs (Individual Savings Accounts) are tax-free savings accounts for children under 18.
Pension contributions can be a tax-efficient way to save for their future. Up to £3,600 can be contributed to a child's pension each year, which is eligible for tax relief.
National Savings & Investments (NS&I) Children's Bonds: NS&I Children's Bonds are savings bonds available to children under 16. The bonds have a fixed term and offer a guaranteed rate of return, and any income generated is tax-free.
How can I encourage my child to save money?
It's never too early to start teaching your child about saving money. Even young children can begin to learn about saving and the value of money.
Set a good example. Children learn by example, so ensure you model good saving habits yourself. Talk to your child about saving and show them how to save money.
Give them pocket money. Giving your child pocket money can be a great way to teach them about budgeting and saving. Ensure you set clear expectations about how much they should save and what they can spend their money on.
Make it fun. Saving money doesn't have to be boring. Encourage your child to set a savings goal for something they want and make a plan for how they can save up to buy it. This can help make the process more engaging and exciting for them.
Celebrate milestones when your child reaches a savings milestone, such as saving a certain amount of money or reaching their savings goal. With teens, motivate them to save by adding a financial reward when they hit a savings goal. This can help motivate them to keep saving and make it a habit.
Related: How to save money as a kid, How to save money as a teen
How much should children and teens save?
How much children should save will depend on their circumstances and goals, but what can help are the following:
Set a savings goal. This will encourage your child to set a specific savings goal, such as buying new clothes or saving for university.
Save a percentage of income. A good rule of thumb is for your child to save at least 10% of their income or pocket money. This can help them develop the habit of saving.
Consider their age, as younger children may save smaller amounts, while older children and teens can save more. Plus, if your teen is working, increase their savings accordingly.
Budget for expenses. Teens need to learn how to budget, save for expenses, and save for the future. Encourage them to set aside money for expenses, probably higher than younger children and adapt their savings accordingly.
Related: How much should teenagers really have saved?
What's the difference between GoHenry and a savings account?
GoHenry is a pre-paid debit card and app that allows parents to set limits and controls on their child's spending. Parents can add pocket money, allocate money for specific chores, and monitor their child's spending in real time. GoHenry also offers features like savings goals and financial education.
On the other hand, a savings account is a type of bank account that earns interest on the money deposited. A savings account typically has restrictions on the number of withdrawals allowed and may require a minimum balance to earn interest. Parents or legal guardians can open a savings account for their child and manage the account on their behalf until the child reaches 16 or 18.
The main difference between GoHenry and a savings account is that GoHenry is designed to teach children about financial education and managing money daily. In contrast, a savings account is designed to help children build up their savings over time.
How to help your child build savings habits with GoHenry
A pre-paid debit card like GoHenry can help your child build savings habits by enabling you and your child to set savings goals. Not only can you automate regular savings, so a portion of their pocket money is allocated to savings every week, but they can have a range of separate saving pots depending on their goals. Having short and long-term savings goals can motivate them to keep saving and teach them the benefits of spending wisely.
GoHenry also has Money Missions on the app, which helps kids learn more about saving accounts, savings and long-term investments with quizzes and bite-sized lessons.
Capital at risk. The value of your investment can go down as well as up, and past performance is not a guarantee of future results. Tax treatment depends on your individual circumstances and may be subject to change.
The information provided is not intended to be investment, tax or legal advice – nor does it claim to be comprehensive. Speak to a professional if you’re unsure about whether investing is right for you. We do not endorse any third parties referenced.
Junior ISA rules and terms and conditions apply. Investment services are provided by GoHenry Family Finance Limited, an Appointed Representative of Resolution Compliance Limited which is authorised and regulated by the Financial Conduct Authority (FRN: 574048).