How To Pick a Savings Account For Your Child
Should Your Child Have a Child Trust Fund/Junior ISA Instead?
This will depends if your child pays tax now (most don’t) and if you want to keep the cash locked away or keep control of it.
If you child doesn’t pay income tax then they can earn up to £17,000 in interest without having to pay a penny in tax so a junior ISA wouldn’t be needed.
If you expect them to have a high amount of savings when they turn 18 then a junior ISA might be the best account. These will convert to a full ISA when they turn 18 so it become permanently tax free.
If you child will need access to the cash before they turn 18 then a junior ISA wont be ideal. Cash in Junior ISA’s are locked away ( Once they turn 18 the money is theirs) so a normal child savings account would be best.
A great idea would be the have your child involved in the process. This will help them to learn about money and financial planning for later in life.
Choose The Account Together
Think of this as a chance to help tech your child how to pick the best account for them. Explain the benefits and cons of each account. It will help to explain why something is a benefit or a con so they can better grasp how you came to that decision.
Ignore The Freebies
Banks may try to temp you by offering free toys and gifts. Explain that this is often used by banks that offer very low interest rates as a way to mask this. The only thing they need to care about is how much interest they will get. This is another important lesson for your child as they learn to ignore the carrot dangled in front of them as focus on the important aspects.
Real Vs Piggy Banks
Explaining to your child about the difference between piggy banks and real banks can help them to understand the savings process. For example if you explain that when they put their money into their piggy bank it stays there and will only increase when they add more to it. But if they put their money into a bank they are actually lending the bank their money and the bank will pay them for doing so.
Explain that this is called interest. The longer they can keep lending the bank their money and the more they lend them the more money the bank will pay them.
Set out a Savings Plan for Pocket Money
An example of helping your child to save and understand why it is important to get them to save 50% of their pocket money. A way of doing this would be for example if they had £5 a month pocket money get them to save £2.50 and say for every pound they save you will give them £0.50 at the end of the year as a reward.
Monitor The Rates
Get your child to monitor the rates of their account and other accounts offered by other banks on a monthly basis. This will help them to make sure they are always getting the best deal possible and to understand the importance of being proactive with savings.
Pick an Account That is Going to be Safe
This can be a great discussion with your child. Explain that a piggy bank at home is something they can see, hold and check when every they want. And while a bank is safe it could collapse. Explain that as long as they have less than £85,000 the government will protect their money in the unlikely event this was the happen. On the flip side keeping money at home is not very secure. Theft of money and potential fires in the home could destroy any savings. This ma y sound far fetched but this does happen and its something to think about.