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Savings bonds for children – how they work and what to do if your child still has one

Savings bonds for children are a great way of setting money aside for a young person to be able to access when they become of age. The age for accessing these funds is ordinarily 18 in the UK. But how do these funds work? We’ll explain it all in this article.

Savings bonds for children: Summary Table

🤔 National children’s savings bonds was previously known as?National children’s bonus bonds
What is a children’s savings bond?They are lump sum investments for a 5-year term
🤑 Does children’s savings bond earn interest?Yes, it earns a guaranteed flat rate interest throughout the 5-year term
🙋‍♀️️ Are the returns on children’s bonds taxed?No, the returns are tax-free for the child and parent

National Savings children’s bonds – how they used to work

Up until September 2017, you could apply for savings bonds for children from the government-backed NS&I (National Savings Investments). You could invest up to £3,000 in such an account for up to five years, and they earned 2% AER (Annual Equivalent Rate) interest, tax-free. 

These national savings bonds for children could be initiated by the parents, grandparents or legal guardians of any child under the age of 16.

Since September 25 2017, new national savings bonds for children are no longer available. At the time the door was closed for new bonds, there were hundreds of thousands of bonds outstanding. They can still be renewed after five years, providing the child is below the age of 16. 

Back in March 2017, there were nearly 840,000 national savings children’s bonds with a total value of £500 million. Today, according to an article in the Daily Mirror, there are still over 800,000 bonds still out there, worth more than £183 million. Divided out, it means that the average amount is £226.82 per child.

Any person who suspects they may have a lost new baby savings bond still outstanding should get in touch with the NS&I. It could be well worth it because unclaimed bonds will end up as “residual accounts,” earning a measly 0.03% interest per year – way, way below the current rate of inflation. In other words, they are losing value in real terms at a considerable rate.

Managing savings bonds for children under 16 years of age

Children often aren’t much interested in things like interest rates. But if the child is old enough, you can and should talk to them about the subject.  But if you are managing a new baby savings bond for an under-16-year-old,  it’s up to you to transfer it somewhere it could earn more interest. 

When the young person in question turns 16, they can manage their own national savings childrens bonus bonds. 18-year-olds can access the money should they wish to.

Whether you are a parent, grandparent, a guardian or a 16/17-year-old, you need to know what options are open to you.

What you need to know about the early cashing in of child savings bonds

Children’s bonus bonds national savings UK, the old name for national children’s savings bonds, can be cashed in at any time by a parent, grandparent, guardian, or 16/17-year-old. They can be cashed online if the person wishing to carry out the encashment has an online account with NS&I. 

However, if you encash the bond before it matures, you will pay a penalty. That penalty is equivalent to 90 days’ worth of interest. If you wish to only cash part of the bond, you must leave a minimum of £25 in the account to keep it open.

Provision made by the NS&I after new children’s bonds blocked

The NS&I didn’t want to leave children in the lurch, so just before the block for raising new savings bonds for children was put in place, they launched their Junior ISA. This in itself doesn’t earn a staggering amount of interest – it makes an unfixed 1.5% AER. However, it’s a hell of a lot better than the miserable 0.03% a residual account earns. 

Another alternative when cashing in national savings children’s bonds is to buy premium bonds. The downside with these is that they do not earn any interest. However, on the positive side, bondholders stand the chance of winning up to £1 million per month and being backed by the Treasury, the money invested in Premium Bonds is 100% safe.

Parents or grandparents can purchase premium bonds on behalf of the child to the tune of between £25 and £50,000 per month. Winnings are tax-free, even if you strike it lucky and win the £1 million monthly prize. But as premium bonds do not earn any interest, you have to calculate the odds of winning a monthly prize (1 in 34,500) against those of gaining interest if the money is invested elsewhere.

Indeed, there are better options – better even than the 1,5% AER the NS&I offers for their Junior ISAs.

The best rate for children’s savings bonds

The interest rates that adults can get on regular savings accounts are pretty poor right now, but this isn’t necessarily the case for children.

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  • The Dudley Building Society offers 3.5% interest on up to £150 per month. 
  • The Saffron Building Society regular child savings account offers 3.02% fixed for one year. 
  • Santander offers 3% up to £2000 on their easy access lump sum deposit account.
  • HSBC offers 2.5% on up to £3000. 

So, there are some decent rates out there, even on regular children’s savings accounts. But what about Junior ISAs?

We’ve already discussed the NS&I Junior ISA, or JISA as it is otherwise known, but there are other ISA products available from different providers that offer substantially more in terms of interest.

Transferring saving bonds for children into Junior ISAs

Let’s take a quick look at the basics involving Junior ISAs.

  • Junior ISAs can only be opened by the child’s parents or legal guardians
  • You can open a Cash JISA with as little as £1
  • You can save up to £9,000 per annum tax-free in a Junior ISA
  • There are two types of JISA – cash, or stocks and shares
  • Any savings, investments, or gains are tax-free
  • A child can only have one Junior Cash ISA and one Junior Stocks and Shares ISA in his or her name at the same time.

The money invested into a Junior ISA, regardless of whether it is a Cash or Stocks and Shares ISA, also referred to as an Investment ISA, cannot be accessed by the child until he or she turns 18 years of age. They can, however, take over management of the accounts from the age of 16.

Savings bonds for children versus investment JISAs

The great thing about National Savings childrens bonus bonds and Premium Bonds is that the money in them is completely safe because it is backed by the Treasury. Cash ISAs are also relatively safe as deposits up to £85,000 are protected by the FSCS (Financial Services Compensation Scheme).

While the amount of interest that Junior Cash ISAs earn is higher than National Savings childrens bonus bonds, it is still significantly less than can be earned with a Junior Stocks and Shares ISA. However, there is one important thing to be taken into consideration when considering investing in stocks and shares, and that is the element of risk. But these things have to be looked at in perspective.

Yes, there is a risk in any investment, and it is caused in the main by two things – putting all your eggs in one basket and the investment ending, or money being withdrawn, when market share prices have dropped. 

Research undertaken by the TSB suggests that 35% of Brits don’t have a lot of confidence in their financial knowledge and skills, and this is in part responsible for their reluctance to get involved with long-term investing. 

Diversify and investing for the long-term

Being too dependent on one investment is easily dealt with: diversify the portfolio. If you don’t have the skills to do this yourself, you can use a robo-advisor or a conventional wealth management company.

As for the timing, savings bonds for children are usually long term investments anyway. So are Junior Stocks and Shares ISAs, and this is another factor that significantly reduces risk. This type of JISA should therefore be a serious consideration.

Understanding risk and risk mitigation

It is understandable that if you are thinking of transferring any new baby savings bond accounts still running that you want the money to remain safe. But you also want that money to grow as much as possible, and compound interest rates, which JISA rates are, can do just that.

According to research carried out by Moneyfarm, the nominal annual gross revenues of investment ISAs over the past 10 years averaged 9.64% growth. This compares to a Cash ISA growth of just 1.21%, and other regular child savings accounts that offer up to 3% or 3.5%. The difference is significant. It all comes down to understanding the risk and risk mitigation.

If in doubt, the advice is to seek professional advice.

FAQ

What will happen to children’s bonds maturing soon?

Depending on the child’s age, all funds in current maturing savings bonds can either be cashed in or moved into another N&SI or an N&SI Junior ISA if the child is less than 18 and has no Junior ISA or Child Trust Fund. 

What happens to the children’s bonds cash if I cash in early?

There is a penalty for withdrawals done before the end of the bond term. There is a 90 days interest penalty on the amount withdrawn.

What is the equivalent of an NS&I children’s bond?

The NS&I children’s bond equivalent includes children’s premium bonds or investment accounts such as N&SI junior ISA, junior ISAs, child trust fund, and children’s pensions.

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