Teach your child the right way to save
A savings account is the perfect financial product for every child. As well as letting them earn interest on their savings, it also enables them to learn about money and, hopefully, catch the savings bug.
Several factors will determine which savings account is right for your child. The interest rate is important, and at the top of the Moneyfacts rate tables (at the time of going to press) are a one-year fixed-rate regular savings product from Halifax paying 6% gross, and a five-year fixed-rate bond from Clydesdale Bank paying 4.45%.
For a standard instant-access account, the top deals come from Northern Rock, which pays 3%; Chorley & District Building Society, paying 2.9%; and Earl Shilton Building Society, paying 2.25%.
But rather than taking the best rate, you might also want to look for an account that consistently pays high rates, especially if the plan is for the savings account to grow with your child.
This was one of the criteria used in Moneywise's children's savings awards, alongside fair terms and conditions, putting Chelsea's Ready Steady Save paying 2% in first place, with Halifax's Save4it paying 1.05% second.
Terms and conditions are worth checking out too. Many accounts have a minimum investment of £1, which is great, but look out for higher minimums. For instance, Earl Shilton has one of the top rates but requires a minimum investment of £250.
Perhaps more troublesome are terms and conditions surrounding withdrawals. Although most of the standard accounts are fairly flexible, you can run into trouble if you want to move money around with a regular savings or fixed-term product.
For example, with Halifax's Children's Regular Saver, you'll get an interest rate of 6%, providing you save regularly and don't make any withdrawals during the course of the year.
Whether you go for a simple account or one with more terms and conditions, you might also want to pick something with a local branch. Being able to go into a local bank or building society to pay in money can really help a child develop a good savings habit.
Another advantage of opening a savings account for a child is the tax position. Save in your name and if you're a taxpayer, the taxman will swipe anything from 10% to 50% of the interest earned.
But while your child has exactly the same tax allowance as you, chances are they won't use it, so interest is paid tax-free. All you need to do is complete form R85, which the bank or building society will be able to give you.
There is an exception to this, however. To prevent tax evasion, if more than £100 of interest is generated a year by money given by a parent or step-parent, it will be treated as theirs for tax purposes.
If there's a possibility of a tax charge, whether due to the child having other income sources or the money coming from a parent, there are a number of tax-free savings products that may be worth considering.
At 16, a child can open their own cash individual savings account, into which they can save up to £5,100 each year.
Even where there's no immediate risk of paying tax it can be worth considering a cash ISA. Not only will the money be sheltered from tax when they do start paying it, but rates are often better.
For example, according to Moneyfacts, if you want instant access and a minimum deposit of £1, the best ISA (Cheltenham & Gloucester's cash ISA) pays 2.7%, compared with the best savings account (Northern Rock's Branch Saver) at 1.9%.
For younger children, or as an alternative to an ISA, a range of tax-free savings products are also available from National Savings & Investments. Children's Bonus Bonds pay a guaranteed rate of interest, with a bonus added every five years.
For example, the current issue, number 34, pays a guaranteed rate of 2.5% a year, including the fifth anniversary bonus.
The NS&I has withdrawn its index-linked savings certificates from sale for now, although existing customers can roll over their investment into the same issue.
These are also tax-free and taken out for a fixed term, usually three or five years, over which time they are guaranteed to beat inflation.
And, if you like a bit of a gamble but with the added security that you'll never lose your initial investment, premium bonds can also be taken out in a child's name.
Investments start at £100 and each £1 bond could win anything from £25 to £1 million each month, completely tax-free.
A form of National Savings Certificate, premium bonds are effectively gilt-edged securities: you loan your money to the government and, in return, it pays you for the privilege with a guarantee it will return your capital at a specified date. Where premium bonds differ is that the interest payments (currently 1.5%) are pooled and paid out as prize money and you can get your cash back within a fortnight, with no risk. Launched by Chancellor of the Exchequer Harold Macmillan in his 1956 Budget, every single £1 unit has the same chance of winning and in May 2011, 1,772,482 winners (from a total draw of 42,539,589,993 eligible bond numbers) shared £53,174,500. The odds of winning are 24,000 to 1 and the maximum holding is £30,000 per person but it remains the only punt in which you can perpetually recycle your stake money.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.