The tooth fairy, generous grandparents, and a weekly pocket allowance all need to go somewhere, but instead of your child stashing this cash into a piggy box, or splashing it at the toy shop, why not encourage them to put it into a bank account so they can watch it grow.
If you want to get your child into the savings habit, whether it’s for putting money away for the latest Paw Patrol set or something more long term such as building up a university fund, it’s worth seeking out an account that pays well.
Children can earn quite a good rate of interest on some of the top savings accounts, of around 4.5 per cent interest, which is a lot higher than the average amount you would get in an adult account.
Getting your kids into a regular savings habit is also a good way to teach them the lesson of saving up, and letting them watch their money grow.
There’s a few different options available, either a regular savings account whereby the money can be taken out when your child needs it, or a junior ISA, which they won’t be able to access until they turn 18.
Let’s look at the junior ISA first, or JISA as it’s known.
These were first introduced in 2011 and they are tax-free savings accounts. They can be used to put money away for when your child is older as the money can’t be accessed until they turn 18, at which point the account becomes an adult ISA.
You can choose from either a cash JISA, or an investment JISA, and there are lots of different providers who offer these accounts.
Therefore it’s worth finding one with a decent interest rate as under 18s can put £4,260 into one each year.
Children’s savings accounts
If you want a little more flexibility, a children’s saving account might be a better option - although there’s nothing stopping you having one of these and a JISA.
With savings accounts, you can choose from a regular savings account, whereby money can be put in and taken out at any point, or a fixed-rate interest account where you lock the money away for a longer period, usually between one and five years.
What to watch out for
When looking for a new account, get your child involved in researching the best accounts but be careful they aren’t swayed by the freebies on offer and look for the best interest rates instead. This will pay off for them in the long term, as they’ll earn more interest on their savings, and it’s a good lesson to get them into the habit of looking behind the gimmicks.
Whatever account you choose, children don’t pay any tax (as long as they don’t have another income) on the first £17,850 they earn on their savings.
However, if money is gifted by a parent and the interest earned on this money is more than £100 it will be counted as if it is the parents money - and will add to their yearly ISA limit, which for the current tax year is £20,000.
Also make sure the account they choose is covered by the Financial Services Compensation Scheme, as this protects up to £85,000 in case a financial institution goes bust.