Savers Friend ® Children’s Savings Guide The lessons children learn in their formative years can stay with them for the rest of their lives. So why parent handbooks do not feel compelled to devote a chapter to encouraging the savings habit from an early age is a mystery. The options available in respect of children’s savings are many. An array of bank and building society accounts vie for attention next to offerings from National Savings and Investments (NS&I) and Junior ISAs, amongst others. Consideration has to be paid to the issue of tax on children’s savings too, though sufficient options should be available to ensure youngsters keep all of the money that is made. Children’s accounts Although most banks and building societies offer special accounts aimed at children, they will tend to operate in the same way as ordinary savings accounts and come in similar variations too. Not to be distracted by the free gifts that most children’s savings accounts offer is the first thing to remember. While a free piggy bank might prove tempting to many young savers, an additional 1% interest rolled up over 18 years will be worth an awful lot more. Most children’s accounts are instant access accounts which offer a variable rate of interest and allow withdrawals at any time. But while some parents want the option to access money at will, the rates payable on such accounts can usually be bettered elsewhere. To secure a higher rate, a certain commitment will normally have to be made in return. Fixed rate accounts, for instance, pay a guaranteed rate of interest for a set period of time during which money should be left untouched. Such accounts tend to be best suited if there is a lump sum to invest on behalf of a child, and the money will definitely not be needed for a long time. For those wanting to put a smaller amount away each month, regular savings accounts are the popular option. In return for promising to save a minimum amount on a monthly basis, these accounts often pay a higher amount of interest. Tax and children Although tax is a consideration for young savers, in most cases a child’s continued overleaf GUIDES YOU Key Facts • Children’s savings accounts from banks and building societies come in similar variations and tend to operate in the same way as adult accounts. • Although children are eligible to pay tax on their savings, allowances and the availability of tax-free products means most will not have to. • NS&I offers two different taxfree products which are popularly used to save for children – Children’s Bonds and Premium Bonds. • In the 2015/16 tax year, the maximum that can be saved into a Junior ISA or Child Trust Fund is £4,080. • Since April 2015, it has been possible to transfer from a Child Trust Fund into a Junior ISA. Useful Links See latest Children’s Accounts Variable JISA Fixed Link to Reviews Visit the latest Savers Friend Related Guides Junior ISAs Tax-Free Savings Depositor Protection Full list of Guides Children’s Savings Guide page 1 Children’s Savings Guide continued nest egg should not suffer at the hands of HMRC. Interest earned on children’s savings counts as taxable income, but, from April 2015, anyone with taxable income of less than £15,600 will not have to pay tax on their interest. As long as a child’s annual income is below this amount, any interest earned can be paid gross, without tax deducted, if a parent fills out a Form R85 when the account is opened. Similarly, completing a Form R40 will see any tax claimed back that should not have been paid. While there is no limit on the amount of money that can be saved on a child’s behalf, parents depositing large sums should be aware of a potential tax implication. If money contributed by a parent earns more than £100 interest a year, this interest will be taxed as if it were the parent’s. It should be noted, however, that the £100 limit applies to each parent, giving a £200 limit in total if both parents give money. While grandparents and other adults can give as much as they like without such repercussion, it should be remembered inheritance tax might be payable if the donor dies within seven years of making the payment. NS&I For those wanting to avoid the tax minefield altogether, a number of taxfree savings products are available specifically for children. A popular option, not least because Government-backing means investments are effectively 100% secure, are Children’s Bonds from NS&I. Running for a term of five years, the bonds provide tax-free interest for children under the age of 16, with up to £3,000 allowed to be invested per child per issue. On the fifth anniversary, the bond can be renewed, although final maturity must be on its first five-year anniversary on or after the child’s 16th birthday. Although withdrawals can be made from the bonds early, a penalty equivalent to 90 days’ interest is Last revised: 6th April 2015 deducted from the amount cashed in. If the child is 16 or over on the maturity date, they will be contacted directly by NS&I as they will then be responsible for the bond. Not specifically designed for children, but able to be purchased for minors in trust, are Premium Bonds. While Premium Bonds do not pay interest, each bond number is entered in a monthly prize draw. Two £1 million top prizes are on offer, together with smaller rewards ranging from £100,000 to £25, all of which are paid tax-free. Although the bonds can be cashed in any time, and no penalty is applied, it should be remembered they offer no guarantee of a positive return. Indeed, if no win is forthcoming, inflation will reduce the spending power of savings held as premium bonds. The odds on winning are approximately 26,000 to 1 each month. “For those wanting to avoid the tax minefield altogether, a number of tax-free savings products are available specifically for children.” CTFs and JISAs Child Trust Funds (CTFs) and, more recently, Junior ISAs (JISAs) are the Government’s attempts to get the nation’s youngsters saving. Unveiled in April 2005, CTFs are tax-efficient savings accounts available to children born between 1 September 2002 and 2 January 2011. In an attempt to kick start the savings process, qualifying children received a £250 voucher from the Government at birth to invest into their CTF, with a further £250 promised on their seventh birthday (vouchers increased to £500 for low income families). This generosity, however, proved the eventual undoing of the CTF. In May 2010, the cash-strapped coalition announced CTFs were to be withdrawn. Although all Government contributions stopped from 1 January 2011, existing accounts remain taxfree. In the 2015/16 tax year, parents, friends and family can contribute up to £4,080 per year. CTFs can be transferred between providers to secure better returns, and since April 2015 have been able to be transferred into a JISA. It is an option that has long been campaigned for and given the higher rates of interest, lower charges and wider choice of investments that are typically available among JISAs, one that CTF holders should consider exercising. Available to children under the age of 18 who are not eligible for a CTF, JISAs were introduced in November 2011. As with CTFs, up to £4,080 can be placed into a JISA in the 2015/16 tax year, with contributions able to be made into cash and/or stocks and shares, the two investment options that JISAs offer. Importantly, as with CTFs and adult ISAs, returns are taxfree, except for a 10% tax credit on the dividends on stocks and shares. The Government vouchers that came with a CTF, however, are no more. Loophole Also worth pointing out is a loophole which allows 16 to 18 year olds to hold a cash ISA alongside a JISA. While contributions can be made into a Junior ISA up until a child is 18, when a child turns 16, they are also eligible to open a cash ISA. HMRC has confirmed that youngsters in this particular age group can therefore save up to £19,320 tax-free each tax year by making use of the £15,240 limit available on a cash ISA alongside the £4,080 limit on a JISA. Further alternatives Less well known are Child Tax Exempt Savings Plans (TESPs). Available from Friendly Societies, TESPs are tax-free stockmarket based investments that must be held for a period of at least ten years. Up to £25 a month can be put into a plan to eventually provide a tax-free lump sum, which cannot be taken until the child is at least 16. It is important to remember that while stock market exposure can deliver substantial gains, there is also no guarantee that money will not be lost. Children’s Savings Guide page 2
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