LIKE millions of parents, I opened bank accounts for my two children when they were very young to encourage them to save. I am keen for them to develop good financial habits, and figured it is never too early to start.
Sadly, I picked an account on which I have just been informed that the interest rate is being slashed from 2.97% to 0.99% which, as cuts go, is pretty savage. Those children lucky enough to have a balance of more than £20,000 will also be hit by a rate cut, from 0.5% to 0.2%.
My children, Isabel, 7, and George, 5, are just two of a huge number of junior account holders affected by the cut, though the bank involved, TSB, will not reveal the exact number.
Their Young Saver accounts were opened in 2012, when they were 4 and 2. Back then, the bank was still Lloyds TSB and their savings earned 2.97%. The Bank of England has held interest rates at 0.5% since 2009 — but banks and building societies are still cutting returns for savers.
My choice of financial institution turns out to have been a rather irritating one, though. When Lloyds TSB split into different banks two years ago, my children’s accounts were “allocated” to TSB, rather than staying with Lloyds.
TSB was created on the orders of the European Commission as a condition of Lloyds’ taxpayer bailout in 2009. The ruling was designed to increase competition in the British banking sector.
More than 630 branches were hived off, with more than 4.5m customers and 8,000 staff, to form the independent bank TSB in September 2013. Customers of 1,300 branches saw them rebranded as Lloyds bank.
From November 17, youngsters who ended up on the Lloyds side will continue to earn 2.97% from their Young Saver accounts, whereas children with the same account who were shovelled off to TSB will be forced to move elsewhere unless they accept a far lower interest rate.
For customers, the division between Lloyds and TSB was just luck of the draw. For example, my own current account, opened during my university days in Cambridge, stayed with Lloyds. But my children’s accounts, opened in Stoke Newington, north London , where we used to live, were with a branch that switched.
However, TSB defended the decision to cut its Young Saver rates. Des McDaid, head of savings, said: “When TSB launched, we inherited a number of youth savings accounts that paid varying interest rates.
“We continually review our accounts to ensure all customers with similar accounts are earning comparable rates. As a result, some customers will see their rates increase, while others may see a decrease.”
Teaching children to save
I opened Isabel and George’s accounts with £50 Christmas money they received. Rather than spending it in the January sales, we made a trip to our local branch of Lloyds TSB. It’s all fun in our family.
I hoped it might get them started on saving, and stand them in good stead for their later life. They were delighted to receive Stanley the dog moneyboxes from the bank, some stickers and picture books.
The rate cut will not have a huge impact on them. They have balances of only about £170. Interest has added a little over £10, which is not going to get them onto the property ladder, but is at least money they would not otherwise have had.
I would like them to learn that if you salt away savings, rather than squandering the cash on Haribo, the bank will pay you for the privilege by adding interest. Now they are older and receive the princely sum of £1 a week pocket money, I would also like them to realise that they can save up for things rather than borrowing the money. By forgoing a Kinder egg today, they can save towards a longed-for Lego set later.
Suitable savings accounts
Easy access accounts, opened with as little as £1, are a great way to encourage children to save. Fortunately, some banks and building societies continue to pay about 3% on such accounts (see table).
Anna Bowes of the advice site savings–champion.co.uk said: “Savings rates on many children’s accounts are better than on equivalent adult one — often because the maximum deposit is limited.”
Brands under the Lloyds Banking Group umbrella all offer Young Saver accounts that can be opened from birth with just £1, and pay 3% a year at Halifax, or 2.97% at Bank of Scotland as well as Lloyds bank on balances of up to £20,000.
Nationwide’s Smart Limited Access account also pays 3% up to £50,000, but this drops to 0.75% if there is more than one withdrawal in a year. HSBC’s MySavings account adds free gifts, including a mini safe money box, to a decent interest rate of 2.96% up to £3,000. Children aged 7 to 17 can start saving with £10.
With some of these accounts, they can be opened only if a parent already has an account with the bank.
Charlotte Nelson of the data website moneyfacts.co.uk said: “Some children’s accounts offer the flexibility to dip in and out of savings, but often the best-paying accounts restrict access or have a fixed time period. Parents should assess whether the child will need access to the money. It’s always wise to shop around to see which account best suits your situation.”
I plan to come full circle, and move the children’s money back to Lloyds.