One or two of us at RobMac are now enjoying the experience of becoming grandparents! And many of our clients are in that position too and often ask us about gifting money to their grandchildren. We therefore thought it would be a good idea to explore some of the options that are available as you can get your grandchildren off to a great start with a carefully chosen financial gift – and with an extra boost from the taxman too.
This week we’ll look at Children’s Savings Accounts. And over the coming weeks we will also look at:
1. Junior ISAs
4. Bare Trusts
And by association:
· Can you open an investment account for your grandchild?
· Tax benefits of investing for your grandchild
Putting money away for your child can provide them with welcome funds for later in life. The cash could pay for university, a deposit on their first home – or anything in between.
Opening a savings account is also a great way of teaching children (when they are old enough to understand) about money and encouraging good savings habits.
Children’s savings accounts are available from a range of banks and building societies and work in a similar way to adult savings accounts.
Children’s savings accounts usually run up to the age of 16 or 18 and can be opened with as little as £1. Depending on the provider, they can be managed online, in branch, over the phone or via the provider’s app.
Parents, legal guardians, and sometimes grandparents can open a children’s savings account on a child’s behalf.
The account will usually need to be held in trust until the child reaches the age of seven, at which point the child can start managing their own account if desired.
Children aged seven and over can usually open their own savings account, depending on the provider, but they may need their parent or guardian’s consent. The exception here is Junior ISAs as children must be aged 16 before they can open their own account.
Generally, anyone can pay into a children’s savings account, including friends and other family members.
Children’s accounts with best returns are far from ‘one-size-fits-all’. Terms vary too, from minimum deposit amounts and ages, to access and how the accounts can be opened and managed. Savers need to consider which type of savings account best suits their requirements and then look for an online comparison to see which account pays the best rate.
Interest rates on children’s savings accounts are expressed as an Annual Equivalent Rate (AER) and tend to be higher compared to rates on adult savings accounts.
Children’s easy access and notice savings accounts usually pay lower interest rates compared to fixed rate accounts, and rates are usually variable so can go up or down at any point.
Fixed rate accounts pay fixed interest rates for the term of the account. This has the advantage that the savings rate won’t suddenly drop. But on the flipside, should external interest rates rise, the money is locked away in an account that is no longer competitive. For this reason, some savers may prefer to stick to a shorter-term account.
Children are taxed in the same way as adults. This means they can earn a total of £12,750 before paying tax (provided they have no earned income) in the 2022/23 tax year.
So, this means that, in most cases, children won’t have to pay tax on their savings.
However, if money gifted by a parent earns more than £100 in interest per year in a non-ISA savings account, the full amount of interest (not just the £100) will be taxed as if it were the adult’s and not the child’s.
This won’t apply to gifts from other family members and it won’t apply to money saved in a Junior ISA as this is completely tax-free. We’ll look at Junior ISA next time.
Cash saved into an authorised UK bank or building society is protected by the Financial Services Compensation Scheme (FSCS). This means that up to £85,000 per person, per institution, is protected in the event the provider ceases trading.
When the child turns 18 years old, most children’s savings accounts will be converted to a regular instant access savings account.
This is certainly one option to consider, and it will really depend on the individual circumstances. It has the benefit of when the child is older that it can be used to introduce them to money and banking and an understanding of basic finances.
Next time, we’ll look at Junior ISAs. In the meantime, if you have any questions or would like to discuss this further please get in touch. You can call us on 0131 226 6700.
* The value of an investment may go down as well as up, and you may get back less than you originally invested.
