The nitty gritty of getting the best from children’s savings accounts

Everyone wants to see their children and grandchildren succeed in life, personally, professionally and, obviously, financially.

The humble piggy bank was the way many Baby Boomers learnt how to save – the echoing plunk of the coin and weight of the porcelain pig, a satisfying confirmation that savings were indeed growing. Money felt more tangible.

But these days, in what can feel like an almost cashless society, it’s imperative that youngsters learn about both about the value of money and how to use the online savings accounts and banking apps that can make accessing their money so much easier.

One of the best ways of educating kids about money is teaching them about the relationship between savings and spending, and setting them up with a strong savings ethic from an early age.

Helping the younger generation create savings goals teaches them how build their savings muscle as well as how to prioritise what they want to buy, and to understand the importance of leaving some money left to grow over time, while using an actual bank account rather than a piggy bank introduces them to the world of banking at the touch of a phone or computer.

But before you can pass on your knowledge about saving and spending, it’s important to get to grips with the features of children’s bank accounts.

They’re easier to set up than they used to be

Banks are now allowing accounts to be set up exclusively in the name of the child, with a parent or guardian as a signatory in most cases, depending on the child’s age.

Westpac’s Bump Savings account, for example, allows parents or guardians to open an account for children aged under 18 in the child’s name. Any child aged between 12-17 can open a Bump account for themselves, but parental control is mandatory for children under 12. Like many banks, this can be done in a branch or online, for convenience.

Newer style kids accounts have features to help them set savings goals

One of the popular new features in children’s savings accounts is visuals that show the account holder how they’re savings are tracking against a defined goal. Research from Westpac’s customers prompted the development of this feature in the bank’s Bump account, and it’s now one of the account’s most popular features.

“Bump allows parents and grandparents to sit with their child or grandchild and set up regular savings deposits, set up savings goals, and they can have up to six savings goals in the one account and easily track those,” Kathryn Carpenter, head of savings and investing needs at Westpac, says.

“The benefit is that it allows you to set short term and long-term goals, so we see kids from a very early age with savings goals that say things like ‘first home’ or ‘university’. We’ve also have a category called ‘next new gadget’. It’s about talking about what are the rewards of saving when you do it and what are some of the longer-term benefits when you keep up that regular habit.”

Carpenter also says it’s important to help kids understand when and how to spend their money, and how to make it a meaningful experience.

“For example, you could say, ‘I’m going to give you $1,000, $500 of which is for you to spend on what you want, and $500 is going into your education goals. Let’s watch that grow together’,” she explains. “I think that there’s a lot of really fun conversations you can have and a lot of positive behaviours that you can set in some of those regular deposits.”

Interest rates on kid’s saving accounts can vary – do your research

Product comparison sites can provide at-a-glance information about the rates each bank offers on kids’ savings accounts. It’s worth doing your research when investigating the various accounts, as rates can vary quite significantly.

Some accounts let account holders earn bonus interest at various rates if they meet certain conditions, so it’s also worth reading the fine print to ensure your little one gets the most benefit out of the account you choose.

Research the tax implications of interest earnt

Tax on interest earnt on children’s savings accounts is another consideration when opening up this style of account.

According to financial expert Noel Whittaker, it was the Fraser government that “decided to close a perceived loophole whereby wealthy parents invested money in their children’s names to save tax.

“In fact, it wasn’t a loophole, because the tax office has always had the power to assess interest to the person who they believe is the beneficial owner,” Whittaker notes in a Sydney Morning Herald article in February 2018. “But … the ‘unearned’ income of children is now taxed at 66 per cent once it exceeds $416 a year, until it reaches $1,445, after which 47 per cent tax applies on the lot.”

The Australian Tax Office’s website provides an overview of how it views children’s savings accounts, with useful information about who must declare the interest, how and why a child might want to quote a tax file number, as well as whether the child will need to lodge a tax return.

“We generally encourage people to speak to the bank staff about their particular circumstance,” Carpenter says of the taxation situation on children’s accounts. “We also recommend taking a look at the ATO website, which provides some guidelines and tips. We have as a general rule that if the savings account is earning less than $120 a year interest, the bank will not withhold the tax.”

Fees on these accounts are typically quite low

Banks typically tend not to charge ongoing account keeping fees on kid’s bank accounts, but there could be other fees applied to the account.

Setting your grandchildren up for success

Westpac’s Carpenter says that helping kids understand how money and banking works, and encouraging them to set a savings goal and regularly put money aside towards that goal, means they’re more likely to continue saving as an adult.

“We’d encourage people that it doesn’t have to be a big amount, it’s really about starting small and starting early, setting goals and being conscious about it. And I think those very simple steps can actually have a really material impact on children, whether they’re starting from zero or whether starting from 16,” she says.

“If you think about setting your kids up for success, that’s a fundamental thing for their financial and also lifestyle wellbeing.”

Have you set up savings accounts for your grandchildren? Do you get involved in their savings goals?

Things you should know

Before making a decision about any of our products or services, please read all the terms and conditions available at westpac.com.au. Fees and charges apply and may change. This information is intended as factual information, and not as financial advice. It is an overview only and it should not be considered a comprehensive statement on any matter or relied upon as such. © Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714