Saving accounts - they're child's play
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The new ISA has just launched and it is just for kids. Yet not every child is eligible and even if they are, it is not always the right deal. So here are my top ten things that everyone should know about children's savings accounts:
With Chanucah approaching, if you are planning to splash out on the kids why not buy them less and put the money in the bank instead? Teaching the habit of saving is the best gift you can give.
● What is a Junior ISA?
It works almost exactly the same way as an adult one. It is not a product just a tax-free investment wrapper available to under-18s who were born either before 1 Sept 2002 or after 2 Jan 2011. And unlike with the old Child Trust Funds (CTFs) the government doesn't add any cash to it.
If you are wondering about those poor one-to-nine year-olds who miss out, that is because they were eligible for a Child Trust Fund instead.
You can save up to £3,600 per tax year in a Junior ISA, either in cash, which is tax-free, or shares, which are free from capital gains tax. Or you can split it and put a bit in both. Once in the Junior ISA it stays tax-free year after year.
● Are children's savings not tax-free anyway?
No, this is a common misconception - children are eligible to pay tax just like adults. Yet it is unlikely they will be earning over the £7,475 per year tax-free allowance - the amount everyone can earn before income tax. So that means most children's savings are tax-free. To get it paid tax-free you need to fill in an R85 form.
● What is the point of a Junior ISA?
There are two cases where these new ISAs are a big bonus. Firstly, when parents give their children money, if it earns over £100 per year per parent in interest in a normal account then it is taxed at the parents' income tax rate. Junior ISAs avoid this.
Do note that tax is never paid on money genuinely given by grandparents, aunts, uncles, or others. Though don't think you can beat this if you give your niece money and your brother gives your daughter the same amount - that is tax evasion.
Secondly, once a child turns 18 the Junior ISAs auto-converts into normal ISAs. So those with larger savings too big to shove into one year's adult allowance (currently £5,340) will gain. As you can see, this means Junior ISAs are likely to benefit more affluent families.
● They can do what they like with the cash at 18
Put money in a Junior ISA and it is locked away until the child's 18th. Then they are free do whatever they want with it.
Think carefully if you are saving for a purpose such as education or a deposit on a house. You won't have control of the cash. The child can use it for a holiday or a car if they want.
● Top junior cash ISA deals
National Counties BS offers 3.01 per cent AER but there is a minimum deposit of £3,000. If you have less, Nationwide offers three per cent AER with a 0.9 per cent bonus until Oct 2013 with a minimum deposit of £1.
And don't worry, you can transfer it if better rates launch. See www.moneysavingexpert.com/juniorisas
Alternatively, you may want to consider investing the money in shares in the hope the cash will grow quicker. But there is the risk that your child could get back less than you put in. Over longer periods shares usually outperform savings.
● Earn 6% if you can save for your kids regularly
For under-15s, Halifax's Kids Regular Saver pays six per cent AER (annual equivalent rate) fixed for a year if you save £10 to £100 every month. It beats any junior cash ISA rate but fill out an R85 to ensure the interest is paid tax free.
● Top normal kids savings
The top-paying normal easy-access account for children is Northern Rock's Little Rock (Issue 2) at three per cent AER variable.
If you are prepared to lock the cash away for five years they can earn 4.25 per cent AER fixed with Yorkshire or Clydesdale.
● Child Trust Funds (CTFs) can take £3,600/year too
Children with CTF tax-free savings (those born between 1 Sept 2002 and 2 Jan 2011) can't open junior ISAs but the government has increased the annual CTF savings limit from £1,200 to £3,600, so it is virtually the same thing.
However the worry here is that banks and building societies will give better rates to the new Junior ISA deals. So after much lobbying the government is considering a relook at this to perhaps allow people to convert CTFs into Junior ISAs.
● All over-16s can put £5,340 in a standard ISA
This means those who are 16 to 18 can get both junior and adult cash ISAs.
● Financial education
If you are setting up any type of savings for your children, work through the decision process with them. It is great financial education.