What type of savings account is best for my child?
Opening a child savings account is a great idea.
Give your child options: a savings account gives children a financial starting point in life in order to have options to go to university, start saving for their own home, learn to drive, travel or invest
Financial awareness: saving teaches children important financial lessons and encouraging them to develop good savings habits as they grow up
Allow family and friends to contribute: It provides a place where family and friends can save money together for the children that are important in their lives, including a place to deposit money received during birthdays, inheritances and other occasions. The Junior ISA allowance has increased to £9,000 this tax year (2020/2021) meaning that there is ample allowance for parents and families to save together
Money grows over time: Children have a long period of time to save money before adulthood (up to 18 years!). Just like a pension, this is a great length of time to save even small amounts of money into something life changing!
Help provide some certainty: The future for our children is uncertain. With the true impact of the pandemic still to play out, house prices continuing to rise and the imminent threat of climate change upon us (and moreover; our children), the positive impact of a nest egg of any size and the financial lessons that have been learnt along the way offer children a better start to their adult life
Choosing where to invest your child’s life savings is important and will have a big impact on the amount of money they will eventually end up with. There are a number of different options:
Easy access cash savings account
You’ve probably had one of these yourself; it is simply a bank account where you can keep your savings.
Pros: Money can be accessed at any time. Helpful if there is any chance you may need to have a cheeky dip into your children's savings pot at any time in the future
Cons: Interest rates on these accounts are horrendously low at the moment. At best, their money won’t grow very much and at worst, inflation will make it worth less in the future than it is today
As an example, inflation in January 2020 was 1.2% - this means that you would need to earn more than 1.2% in interest to not LOSE the value of that money! To put this into context, NS&I pay 0.01% on one of their easy access savings accounts at the moment - eeek!
Regular savings account
These accounts usually offer a slightly higher interest rate paid over a fixed amount of time.
Pros: Usually offer a 'better' interest rate than easy access accounts but still horribly low at the moment
Cons: Usually you can’t access the money during the fixed period. After the fixed period the bank or building society will usually transfer you onto an easy access savings account paying even worse interest (per above!) Each account has different terms and conditions so make sure you check!
These are offered by National Savings and Investments (NS&I) and they describe them as ‘a fun way to save, with the chance to win tax free prizes each month’. The minimum investment amount is £25 and there is a monthly prize draw where you have a chance of winning a cash prize instead of being paid a regular interest rate.
Pros: There’s a tiny chance you may win a big prize. You'd better hope you're lucky though - the chance of winning the big £1 million prize is 1 in 50 BILLION*! There 7.8 billion people on the plant...you do the maths! However if you do happen to be the luckiest person on the planet, your winnings are tax free.
Cons: No interest is paid on your bonds - so fingers crossed you're lucky! Only 1% of bond holders win a prize (as small as £10) each year.
A Junior Individual Savings Account (JISA for short as it’s a bit of a mouthful!) is a savings account for children that is tax free! There are a few things to note:
There are two types of JISA - CASH and STOCKS AND SHARES
You can invest in a mix of cash and stocks and shares ISAs
You can invest up to £9,000 in the 2020/2021 tax year
The differences between a cash and stocks and shares JISA are:
This is a cash savings account where tax is not paid on any interest earned.
Pros: Tax free and no one can dip in to access the money until the child is 18 years old (at which point the money become theirs)
Cons: Cash interest rates for JISAs remain horribly low at the moment meaning the money won’t grow much and the inflation might devalue it . The pro that the money is locked away until the child turns 18 years old could also be seen as a negative if there is a chance that the money may be needed before then.
Stocks and shares JISA
This type of account is where it gets interesting! Money saved here can be invested into the stock market. Investing, not saving is how to really start to transform a pot of money into something far more valuable.
Stock market investing is a long term game, therefore I would only consider this if you plan on leaving the money invested for 3 years or more.
Pros: Potential for significantly higher returns by investing in companies and stock markets. It is also a good example for children to show how money can work for you
Cons: The value of investments can fall as well as rise. You should be prepared for these 'periods of volatility' (to sound like the Financial Times!) However, if you are investing for 3 years or more, the value is likely to increase if invested sensibly. There is a small fee payable for the management of investments (however in some cases this is as low as 0.1% per year)
Ultimately, the type of savings account you choose will depend on your personal circumstances. A summary of the pros and cons is shown below - please feel free to reach out to us if you have any questions about the options available; we'd love to hear your thoughts.
* Money Saving Expert, 2020