Give your child a savings gift this Christmas

FORGET toys, games, gadgets, robots and Lego, the best gift you can give a child or grandchild this Christmas is a stake in the future.

By setting up a savings account in their name, you can start preparing them for adult life and all the costs it brings, such as university fees or building up a deposit for a home.

It will also teach them about the value of saving regular sums and the miracle of compound interest, which is as magical as anything in Harry Potter.

SAVINGS CHOICE

Rachel Springall, finance expert at MoneyFacts.co.uk, said your first decision is whether to take out a standard savings account or use the tax-free Junior Isa allowance, which allows family and friends to put up to £4,260 into either cash or stocks and shares this financial year.

“Junior Isas are completely tax-free and mature into an adult Isa when the child turns 18,” she said.

Springall said that Junior Isas typically offer better rates than standard children’s savings accounts: “Coventry Building Society’s best buy Junior Cash Isa pays 3.60 per cent, beating HSBC’s standard Mysavings account, which pays 3 per cent on up to £3,000.”

You cannot touch the cash in a Junior Isa until the child turns 18, when it belongs entirely to them.

On standard accounts age limits vary, so you need to check them out individually.

For example, HSBC Mysavings is open from seven to 17, but children under 11 need a parent or guardian’s permission to take out more than £50.

From 11, they can have their own debit card. On other accounts children have to wait until 16 to get a debit card.

A parent or guardian usually needs to accompany a child under 16 to open an account, so pull the paperwork together before visiting a branch.

FIX IT

You can get higher interest rates by setting up a fixed-rate account. Halifax Kids’ Monthly Saver pays 4.50 per cent on between £10 and £100 a month, but only for 12 months.

Many accounts have apps that let users check their balances, but Springall warned: “Never choose an account purely on gimmicks such as freebies or gifts, consider other factors such as interest rates and ease of use.”

TAXING QUESTION

Children’s savings are not usually liable for tax, unless they pay more than £100 interest a year on money given by a parent.

In that case, the parents will have to pay tax on the interest, although only if it’s above their own personal savings allowance. This does not apply to money gifted from a grandparent, while all returns from a Junior Isa are tax free.

David Black, banking specialist at DJB Research, said children get a personal allowance, just like adults. He added: “They are unlikely to have to pay tax on normal savings unless they have a large income, say, from a trust.”

Your choice of account may also depend on how many withdrawals you want to make.

Black tipped Nationwide Future Saver for those content to be limited to just one withdrawal a year. “This pays 3.50 per cent if the parent or guardian has their main current account with Nationwide, otherwise 2.50 per cent,” he said.

It’s available for those up to 15 saving from £1 to £5,000, but the rate drops to 0.5 per cent if you make more than one withdrawal.

SERIOUS MONEY

Black also tips HSBC Mysavings for those who want unlimited withdrawals, and the Santander 123 Mini Current Account, which is available from 11 to 18 and pays 3 per cent on balances between £300 and £2,000: “If the child is under 13, the parent or guardian must have a Santander personal current account.”

You must decide if the child is ready for financial independence, Black added: “Your generosity could backfire if they withdraw the lot and blow it all on a mobile phone, computer game or toy.”