As the New Year dawns we often turn our thoughts to our finances and sorting out our planning for the years ahead. If you are thinking of putting money away for your children it is worth thinking about which style of account you want and what sort of access you need to the money that is being saved.
You also need to think about tax on the interest when opening an account for your children. Most people believe that children don’t pay tax at all but this isn’t true. Children pay tax at the same rate as adults it is just that the vast majority of children never reach their personal tax threshold of £7,475. There is a caveat to this tax position. A child can only have tax free interest of over £100 on any amount given to them directly for saving by a parent or step parent. This tax doesn’t apply to the junior ISA.
There are four main types of accounts that are tailored for children. These are regular savings accounts, fixed savings accounts, easy access accounts and the Junior ISA. Each type of accounts has both positive and negative aspects. I will now outline each type of account in a little more detail.
The Junior ISA is a new product released to the market in November 2009 and replaced the old child trust fund. The major difference from the old child trust fund and other children savings accounts is the amount of money you can save tax free. The old limit on a child trust fund was £1,200 a year. For a Junior ISA you can invest up to £3,000 a year. The allowance for the new junior ISA is more than double the current total allowed for the child trust fund. Taken at the basic level with no the total investment in the old child trust fund was £21,600 over the 18 years for the Junior ISA it is £54,000. The amount that you can invest each year will be linked to inflation and will increase as inflation increases.
The Junior ISA offers a solid way to invest for your child but the money is locked away until the child reaches the age of 18. This really is a long term invest option and one worth considering if you have the cash to spare over such a long time.
If you do not want your cash locked away for so long you could chose a fixed style savings account. These accounts tend to offer a slightly higher rate of interest than standard saving account but as with the Junior ISA the cash is placed in an account that is locked and the money can only be withdrawn after a set period of time. These fixed term accounts tend to work on 5 year cycles. If you are after a higher interest rate, have a decent lump sum to invest and you don’t need access to the cash then these types of account might suit you.
A regular saving account is tied to a money savings plan. For these types of accounts you pay in on a month basis for a fixed term and can then withdraw the cas
h at the end. If you want to save on a regular basis then these types of savings accounts are fine. The issue is that if you miss and payment of wish to back out of the plan you will lose your interest and have penalties applied for withdrawing the money.
The last type of account that you can have is a standard easy access account. This account allows you to save at your own rate and many can be opened with as little as £1.00. You can add and withdraw money as you wish but the interest rates tend to be really poor for this sort of account.
When deciding on a child savings account you need to think about the amount of money you can save and the ease with which you need access to that cash. If you are aiming for a long term investment then it is worth looking at the junior ISA.
Tony Heywood ©