15:03 04 December 2012
Savers continue to be hit hard by plummeting rates, but the good news is that children's accounts so far remain relatively unaffected. So there's no reason not to help out your kids by gifting them cash this year rather than investing in expensive presents that will be probably be long forgotten by next Christmas.
Rates for adults fall
Adult savers have suffered yet another round of rate cuts. The AA has withdrawn its best buy three-year fixed rate bond paying annual equivalent rate (AER) of 3.30%, replacing it with a lower rate of 2.70%, while Santander has also reduced the rates on its Direct ISA and Branch Saver accounts.
Despite these falls, research by MoneySupermarket has found that rates on nearly all children's accounts have remained the same in recent weeks. Only Principality Building Society's Dylan's Regular Saver Bond has seen rates fall, with the latest issue of this account paying 4.00% AER, down from the previous rate of 4.50%.
Even though the vast majority of kids' rates are unchanged, it's vital to regularly check how much interest they are earning, and to move their money if more competitive rates become available elsewhere.
Here, we take a look at some of the best savings accounts for your children's cash, which may prove useful if Santa gives them money for Christmas this year...
Child Trust Funds and Junior ISAs
All children under the age of 18 are entitled to pay into either a tax-free child trust fund (CTF) or Junior ISA. Children born between September 1, 2002 and January 2, 2011 were eligible for CTFs while any child born outside these dates is eligible for the Junior ISA.
Parents can save up to £3,600 a year tax-free into these accounts, either into stocks and shares or cash.
Rates on these accounts, but particularly Junior ISAs, are generally pretty competitive. Halifax, for example, is currently offering a Junior ISA paying an impressive 6.00% tax free on a minimum investment of just £1 for any child whose parent also holds a cash ISA with the bank. The rate falls to 3.00% if they don't. The next best junior ISA is from Coventry Building Society and pays 3.25% tax-free, again on a minimum investment of £1.
The best rate available on a cash CTF, meanwhile, is 5.00% tax-free from Hanley Economic Building Society. However, transfers are not accepted into this account, which means unless you were lucky enough to open this account for your child already, you cannot get access to this rate. The best rate on a CTF which does accept transfers is 3.05% from the Furness Building Society.
However, remember that your child cannot access their Child Trust Fund or Junior ISA savings until they reach the age of 18, so if you want an account that enables them to pay in and make withdrawals earlier than this, you will need to look elsewhere.
Other top children's accounts
Many of the top children's savings rates are offered by regular savings accounts, which usually require monthly payments of between £10 and £250. For example, the best children's savings account currently available is Halifax's Kids Regular Saver account. This pays a rate of 6.00% AER and can be opened with a minimum monthly investment of £10. The maximum amount you can pay in is £100 per month and the rate only applies for 12 months, with no withdrawals allowed.
Other competitive children's regular savings accounts include West Bromwich Building Society's Fixed Rate Regular Saver which pays 4.60% AER and can be opened with a minimum monthly payment of £10. You can save up to £100 a month into this account and you can miss up to two monthly payments. Again, you cannot make withdrawals from this account.
Chorley Building Society's Foxley Regular Saver account is also worth a look, paying 4.00% AER on a minimum monthly investment of £1. The maximum you can pay into this account each month is £150.
Meanwhile, the best easy access account for children is the Virgin Little Rock Access Account. This pays 3.00% gross interest a year, and can be opened with just £1. The maximum amount you can hold in this account is £10,000.
Tax advantages of children's savings accounts
The main advantage of saving into a children's account is that interest is usually paid tax-free. Both children and adults have a personal allowance which, this tax year, is worth £8,105.
That means they can receive up to £8,105 in income (including interest) without paying tax. Parents can request that interest is paid without the tax taken off by filling in form R85 which is available from savings providers or can be downloaded from the HMRC website.
You can give your children as much money as you like. But if you are a parent or step parent and the money you give your child earns more than £100 interest a year, you - not the child - will pay tax on all the interest generated as if it were from your own savings.
Friends, relatives and grandparents, however, can give the child as much as they like and returns will be tax-free, provided the interest earned does not exceed the child's £8,105personal allowance. After this amount, the child will start paying tax on interest earned at 20%.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.
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