How to get a nicer ISA to boost your children's savings

Tax-free accounts for youngsters can provide wildly differing returns, so find a good deal

It's two years since junior ISAs (tax-free savings and investment accounts for children) were launched. It's fair to say they're not a runaway success as just under 300,000 have been taken out since launch, according to Government figures.

However, the millions of parents whose offspring have child trust funds (CTFs), the previous government's tax-free savings account for children, may be losing out. That's because rates on some CTFs have fallen while other providers with competitive rates on junior ISAs don't offer a child trust fund equivalent.

The rules say your child can only have a junior ISA or a child trust fund, not both, and you can pay up to £3,720 into either of them in the current tax year.

The Government is consulting on letting parents transfer CTFs into junior ISAs and, hopefully, George Osborne will give the go-ahead in the Autumn Statement next month. But at the moment it's not something you can do. So how can you maximise the return on your child's savings?

Junior ISAs – best rates

You can invest money for your child through a stocks and shares junior ISA, rather than save it, and you should do better over the longer term. However, investment returns aren't guaranteed and cash junior ISAs are still popular with parents.

You can easily get an account paying three per cent or more on a cash junior ISA, although the top payer, Halifax's junior ISA, pays double that at six per cent.

The catch is that you have to have at least £1 in an adult cash ISA with Halifax. If you don't, the rate drops to three per cent.

Coventry building society's junior ISA pays 3.25 per cent, while Nationwide pays 3.25 per cent until the end of January 2015, when the rate falls to 2.1 per cent.

Mansfield and Skipton building societies both pay a smidge over three per cent at 3.05 and 3.02 per cent respectively.

As with ordinary cash ISAs, you can transfer a junior cash ISA for a better rate although not all providers (Nationwide is one example) take transfers in.

Check your child trust fund rate

If you have an older child who has a child trust fund, the rate may well have fallen – possibly sharply.

But you can still get three per cent interest for the first year, then 2.3 per cent, from the Yorkshire building society. An alternative is Skipton building society, at 2.65 per cent. Both these accounts accept transfers in from existing CTFs.

Tax-free interest

Contrary to popular belief, you don't need to take out a junior ISA or child trust fund for your child to get interest paid tax-free. Like adults, all children have a personal allowance (currently £9,440), which means they can earn up to this level in income without paying tax.

So, unless your child is earning, they can have many thousands in the bank before they'd have to pay tax on the interest.

However, there is a limit on how much parents can pay into their child's account (designed to stop them turning their children into their own personal tax havens).

The rules say each parent cannot generate more than £100 a year in gross interest from the amount that they pay into their child's savings account(s).

Getting interest paid tax-free

If you want interest on your child's account to be paid without the tax taken off, you have to fill in a form called R85, which is available from banks and building societies.

If your child has already paid tax on interest, they can claim it back using a form called R40.

Taxable accounts to consider

Halifax offers a taxable account paying six per cent for one year, but it's a regular saver account and you can only pay in between £10 and £100 a month. Lloyds bank is next with its Young Saver account paying three per cent on balances up to £20,000.

Verdict

The signs are that the Government will change the current nonsensical rules that ban transfers from a child trust fund into a junior ISA.

If it doesn't, check the interest rate on your child's current CTF and transfer it to another CTF provider if you can get a better rate. And if your child has generous relatives and can save more than the junior ISA/CTF allowance, use a taxable account but get interest paid tax-free.

Savvywoman.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Sales Assistant / Buyer

    £15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

    Recruitment Genius: Customer Service Advisor

    £15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

    Recruitment Genius: Compliance Manager

    £40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

    Day In a Page

    Greece says 'No': A night of huge celebrations in Athens as voters decisively back Tsipras and his anti-austerity stance in historic referendum

    Greece referendum

    Greeks say 'No' to austerity and plunge Europe into crisis
    Ten years after the 7/7 terror attacks, is Britain an altered state?

    7/7 bombings anniversary

    Ten years after the terror attacks, is Britain an altered state?
    Beautiful evening dresses are some of the loveliest Donatella has created

    Versace haute couture review

    Beautiful evening dresses are some of the loveliest Donatella has ever created
    No hope and no jobs, so Gaza's young risk their lives, climb the fence and run for it

    No hope and no jobs in Gaza

    So the young risk their lives and run for it
    Fashion apps: Retailers roll together shopping and social networking for mobile customers

    Fashion apps

    Retailers roll together shopping and social networking for mobile customers
    The Greek referendum exposes a gaping hole at the heart of the European Union – its distinct lack of any genuine popular legitimacy

    Gaping hole at the heart of the European Union

    Treatment of Greece has shown up a lack of genuine legitimacy
    Number of young homeless in Britain 'more than three times the official figures'

    'Everything changed when I went to the hostel'

    Number of young homeless people in Britain is 'more than three times the official figures'
    Compton Cricket Club

    Compton Cricket Club

    Portraits of LA cricketers from notorious suburb to be displayed in London
    London now the global money-laundering centre for the drug trade, says crime expert

    Wlecome to London, drug money-laundering centre for the world

    'Mexico is its heart and London is its head'
    The Buddhist temple minutes from Centre Court that helps a winner keep on winning

    The Buddhist temple minutes from Centre Court

    It helps a winner keep on winning
    Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

    Is this the future of flying?

    Battery-powered planes made of plastic, and without flight decks
    Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

    Isis are barbarians

    but the Caliphate is an ancient Muslim ideal
    The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

    Curse of Brink's Mat strikes again

    Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
    Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

    'The ministers talk to us about miracles'

    Why Greeks are cynical ahead of the bailout referendum
    Call of the wild: How science is learning to decode the way animals communicate

    Call of the wild

    How science is learning to decode the way animals communicate