Finance

The cost of the wrong savings account

Youssef Darwich

Last week Halifax dropped their “teaser rate” on the Kids’ monthly saver account from a whopping 4.50% to a (still very decent) 4.00%. In this post we look into this a little further and explore how good these teaser rates actually are.

How does the Halifax Kids’ monthly saver work?

At first glance 4% is huge. I think every one of us would love to have our money sitting in a regulated bank account earning 4% (especially in today’s climate). However when you look in to it a little more you start seeing the drawbacks.

Halifax limits you to only putting in £100 a month for a 12 month period. If you do the maths, or just look at their website, that’s a (not so whopping) £24 of interest if you put the maximum in each month.

After that year is up, the rate drops to 1.45%. It gets worse than that though — the rate drops down to 0.01% when the balance of the account exceeds £5,000. If you continue depositing £100 a month this is going to happen just after your child’s 4th birthday.

Now let me ask you something.

How long have you been with your current bank and what made you use them in the first place?

If you’re like a large % of people (around 40% according to TSB), then chances are you’ve been with them all your life and you probably started using them because it’s who your parents decided to open up your kids saving account with. This is exactly what banks prey on. They know this shiny 4% is going to get a load of customers opening up accounts for their children and forgetting about them till the kid turns 18.

If this is you, then by the time your child turns 18, you would have had their money earning 0.01% for 14 years. That £21,600 you put away for them will have only earn £1,164 of interest and you’ll have them a nice pot worth around £22,764.

Now let’s compare that to someone who’s maybe shopped around a little more and gone with Barclays. Yes their headline rate is a little lower at 3.50% (and so might not be the first place you jump) but actually they pay 1.50% after that up to a max of £10,000. This means the shiny pot of money you give your child at 18 will be £1,000 higher at £23,711! Cast your mind back to when you were 18 and remember how precious money was then. How nice would a free £1,000 have felt. That’s effectively what you could give them by making a slightly smarter decision at the start.

Still — you can do more!

What are your options?

If you’re saving for 18 years, it’s worth considering investing the money and not just keeping it in a savings account. If you’re comfortable with having your capital at risk in exchange for potential better returns then open up a junior stocks & shares ISA or a bare trust.

However, I’ve spoken to enough parents to know that it’s not always that easy. Sometimes you’re not comfortable with the risk of investing, which really just leaves you two options. A cash junior ISA (highest one currently paying 2.75% or a savings account. For those of you who think you might need access to that money before your child turns 18, there’s not much you can do apart from put it in a savings account.

But you can optimise that savings account by keeping an eye on it and keeping the other one on what offers other banks have. For example — at the moment Santander are offering a rate of 2% on all savings between £1,000 and £1,500 and 3% on all savings between £1,500 and £2,000. By keeping an eye on offers like these and making sure you always have the right amount of money sitting in the right bank account you could increase the total amount of money you give your child at 18 to £25,332. That’s an extra £2.6k of “free money” over a Halifax account (or an extra £3.3k over HSBC if that’s who your child’s account is with).

This might sound like a bit of a pain and this is why we're looking at building a feature that removes that pain by doing all this for you. Our cash product will constantly monitor your savings, and the market and tell you whenever you need to move money, or direct new money to a different place. Over time we want to automate this completely so you don't even need to do that. We'll just move the money automatically for you and create the accounts when necessary. We'll also help invest the money if that's your preferred option.

Think of us as your money coach — helping optimise your child’s savings and give them the best head start in life.

Disclaimer:

All writers' opinions are their own and should not be read as personal financial advice.  Individual investors should make their own decisions or seek independent advice. As with any investment, your capital is at risk and may be going up as well as down which means you may be left with less than your initial investment. Past performance is not a reliable indicator of future performance. Please note that tax treatment depends on the individual circumstances or each client and may be subject to changes in the future.


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