Children’s savings accounts

Written on the 11th of March 2010 by Continuum Financial Planners Pty Ltd

‘Children’s Savings accounts’ are ‘high(er) interest’ bank accounts that operate in the same manner as a ‘regular’ bank account. They usually are low- or no-fee accounts and may offer bonus interest rates subject to minimum deposits or no-monthly withdrawals.

As with regular savings accounts there are no prescribed payment amounts and parents may deposit money regularly or on an ‘ad hoc’ basis. This is perhaps the easiest option – but also the least tax effective; and also most likely to deliver the poorest ‘returns’ outcome over the long term.

Savings accounts can be either held in the name of the parent as trustee for the child (formal or informal trust), or in the name of the non-working or lower income earning parent or guardian.

Advantages

Simplicity

Security (from market fluctuation risks)

Flexibility (depending on the account: irregular deposits/ withdrawals may be possible)

Can also target the child’s effective tax free threshold on passive income ($420) before the harsh tax rates for minors start to apply

Disadvantages

Low expected return compared to alternatives, especially over the long term

Interest income is fully assessable

Penalty tax rates may apply if the interest income is assessable to the child and above $1,667 (this figure takes into account the low income tax offset)

The interest may be taxable in a parent’s name – depending on how the account is held; and/ or how funds are utilised.

Details about the various offerings on savings accounts are readily available from the websites of the deposit-taking institutions offering them.

If you would like to discuss the strategy that works best for your family and financial circumstances, contact us and be connected to our advice network.