If you want to help your grandchildren save for the future, can you open a bank account for them? Canstar explores what’s involved and some factors to think about.
Grandparents can play a key role in the lives of their grandchildren, and getting involved can go well beyond tossing a ball around the backyard or minding the kids after school. Some grandparents may wish to open a bank account for their grandchildren to help them save for the future, or just to have somewhere secure to slip them some money on birthdays and other occasions.
Why open a bank account for grandchildren?
Young children can learn a surprising amount about money from a very young age. A study by Cambridge University from 2013 found children’s basic views and money habits can be formed by as early as age seven.
The same research shows much of this learning comes through watching the behaviour of the adults around them. So grandparents may be able to help youngsters learn saving habits early by opening a bank account for grandchildren, talking about where the money comes from, helping them grow savings and having conversations around sensible spending.
Can grandparents set up savings accounts for grandchildren?
Some banks make it possible for a grandparent to open a bank account for their grandchild, but it may not automatically be an option with all providers. Some banks specify that you must be either a parent or guardian in order to open a bank account on behalf of a child. Consider checking the account terms and conditions or contacting the bank to ask what its rules are for who can open an account for a child.
Greater Bank, one of the providers that does allow grandparents to open an account for their grandchildren says it’s important to “start out small” when helping a child save.
“Their first savings experience should be a positive one and give them a sense of accomplishment on reaching their target,” its website explains.
How to open a bank account for a grandchild
For banks that allow grandparents to open a bank account for their grandchildren, you’ll likely need to take along some identification and other details when opening the account. This may include the child’s birth certificate and proof of a residential address.
You may need to visit a branch in order to be able to open the account, but some providers may allow for online or phone applications. The process may also vary depending on whether you are an existing customer of the bank or not.
You may wish to enquire with your own bank initially about whether it will allow you to open an account for your grandchild, but also consider checking with other providers so you have some options to select from.
Be sure to enquire about the age at which your grandchild needs to have an adult act as the signatory to transact on the account (for example, to permit withdrawals). With some banks, this can be age 10 or under, while for others, a signatory may be needed if the child is aged up to 14. If you plan to be the account signatory, you will also need to provide personal ID such as a driver licence to open an account for your grandchild.
How to choose a bank account for your grandchild
It’s fair to say that very young children are unlikely to need a transaction account. However, a savings account can be a good option as any birthday or Christmas money can be added to the account, letting the child benefit from compounding interest over time. A savings account can also be used to provide early lessons in spending versus saving, and helping children set – and reach – personal savings goals.
As children move into their early teens an everyday account with a youth debit card attached can be a useful financial tool. It can be an early introduction to managing money electronically, and having a debit card can make parents lives a little easier as many school canteens often accept payment by EFTPOS. Teenagers may also be interested in starting a part-time job, and having a transaction account can be essential to receive wages.
It can still be important for teens to have a personal savings account. It can encourage a savings habit that lasts for life, and even pint-sized balances will grow over time with the benefit of compounding interest.
What to look for in a bank account for grandchildren
Factors that are worth considering in a child’s bank account to help nurture sensible money habits can include:
Zero account-keeping fees
Young children may only have small balances in their bank account, and this can be quickly eaten up if there are high fees. There is no shortage of junior savings accounts that come with zero account keeping fees, so this is definitely something to look for.
A rewarding rate of interest
Youngsters can earn impressive rates of interest on their savings and often higher rates than those available on savings account for adults. This can make it worth shopping around to find a bank account that helps your grandchild benefit from a high rate of interest.
Simple conditions
One of the benefits of setting up a bank account for grandchildren is the opportunity it provides to have relaxed conversations around money and how to grow savings. These simple chats can become more complex if children need to meet a variety of terms and conditions in order to earn a decent rate of interest.
Just as with grown-up savings accounts, junior savers can be asked to make monthly deposits up to a set value to earn the maximum return. While these sorts of conditions can encourage your grandchild to save regularly, it pays to be sure any conditions are achievable and not too stringent, so that your youngster doesn’t lose their motivation to save.
Limits on balances that earn interest
While some kids may build only modest savings, it’s entirely possible that over time your grandchild could grow a substantial balance through a combination of pocket money, cash gifts and interest earnings.
The catch is that some banks may only pay a high rate of interest up to a limit. As a hypothetical example, if the account balance reaches $5,000, a bank might only pay the upper interest rate on any savings below that amount and apply a lower on anything above it.
Tax on children’s savings accounts
One further issue to be aware of is that children can face high rates of tax on investment income – and this includes interest on savings accounts.
The Australian Taxation Office (ATO) states on its website that if an adult both provides the money for a child’s savings account – and spends the cash as they choose, any interest income earned on the account must be included in the adult’s annual tax return.
Where that’s not the case, children can earn up to $120 in interest annually before the bank is required to withhold tax on interest earnings, according to the ATO.
If your grandchild is aged under-16, and earns between $120 and $420 in interest each financial year, you need to provide the bank with details of the child’s date of birth or a tax file number (TFN) for the youngster. Without this information, the bank may withhold tax on any interest earned at a rate of 47%, and your grandchild will need to lodge a personal tax return (probably with mum and dad’s help) to claim a refund of this tax.
It’s worth pointing out that on a savings account earning 3% interest, your grandchild would likely need an account balance of around $4,000 to earn $120 in annual interest. If your youngster is coming close to the threshold, it may be worthwhile applying to the ATO for a TFN for the child – there is no minimum age limit for TFNs. Make sure you record your grandchild’s TFN carefully and share it with his or her parents as this number should stay with the child for life.
Cover image source: YAKOBCHUK VIACHESLAV/Shutterstock.com.
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