17th December 2015
The banks have been “playing Scrooge” when it comes to easy access savings accounts in the past two years, with interest rates cut by more than a third since 2013 warns Savingschampion.co.uk.
However independent savings advice site found that children’s accounts have fared far better, with an average loss of just 6% of interest paid over the same period.
Although this means children’s accounts are far from the goose that laid the golden egg, they have remained fairly unscathed with competitive rates on offer, so parents considering opening a children’s account for Christmas money can rest assured it is still a good option, claims the firm.
Back in 2013, the average rate for the top five children’s easy access accounts was 2.67%, while adults would receive an average of 2.25% on their equivalent accounts.
Fast forward to today and children would see an average rate of 2.52%, while adults have seen a much more significant fall to 1.44%, over 1% less than best buy children’s account average. So the average children’s savings account would have lost just under 6% of its interest since 2013, with adults losing a massive 36% of their savings interest over the same period.
Susan Hannums, director at Savingschampion.co.uk says “Recent years have seen a huge change in the savings landscape with rates falling to record low levels and especially following the introduction of the Funding for Lending Scheme back in 2012, which was the catalyst for record falls in savings rates.
“It’s encouraging however that children’s savings accounts have remained relatively unscathed in the downturn as getting into the savings habit at a young age is the perfect start to a successful financial future and understanding the value of money”
Notably the Financial Conduct Authority’s Cash Market Study found that at the end of 2013 there were around 7m children’s savings accounts in operation worth a total of approximately £8bn – suggesting that around £1,000 was held in each account.
Compare this to the overall number of cash savings accounts, excluding children’s savings, which collectively had deposits of £695bn as at the end of December 2013.
Hannums highlighted that easy access accounts had £354bn on deposit, so by cutting rates by 36% from 2.25% to 1.44% in two years, banks would be saving around £2.86bn a year collectively in interest rates on these accounts alone.
She added: “By cutting children’s accounts by the equivalent amount, they would only collectively be saving £76.8m** and the banks would certainly seem very Scrooge-like in the process – after all, who really wants to take money away from children?”
However, if your children are being given money as well as presents this year, then now is a good time to start a children’s savings account, added Hannums who said that and if you can add to it throughout the year, with parents and grandparents chipping in, the amount you could save for your child up to the age of 18 is impressive.
Putting £100 a month into the typical Children’s’ Savings Account for 18 years at 2.52% interest would give you a lump sum of £27,279. Compare that to the same regular savings for an adult, who at 1.44% for the same 18 years would have £24,649 – a difference of £2,630.
She adds “For parents gifting money to their child they should be aware of the £100 rule. Interest earned over £100 for each parent will be treated as that parent’s interest for tax purposes and therefore they may need to pay tax at their marginal rate.
“Grandparents however are not subject to the same rule and can freely give money to their grandchildren for their future, and it can even help to reduce their inheritance tax liability if their wealth is sufficient to be concerned about this.”