Term deposits offer an ideal solution to the question of how to protect and grow a child’s nest-egg. They can offer a guaranteed safe place to park your child’s savings and earn a high rate of interest at the same time. For this reason, it’s very important to compare term deposits for kids to make sure you’re getting the best deal for your child’s savings.
Savvy can help you get the best interest rate for your kid’s savings by comparing interest rates from a variety of financial institutions and bringing you the very highest interest rates. Find the best deals on term deposits and start comparing options for your child right here with Savvy today.
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Term deposits offer a safe ‘set and forget’ option to look after your child’s nest-egg, whilst also growing it with a high rate of interest. They are a type of bank account in which you deposit a set amount of money for a set period, in return for a relatively high fixed rate of interest. During the term of the deposit, you aren’t able to access those funds, so they’re effectively ‘locked away’ for a period of one month to five years.
Different interest rates are offered depending on the length of time you intend to invest the funds. The longer you invest, the higher the interest rate you will be offered. You’ll also have a choice about when the interest is paid, and where that interest ends up.
You can choose to have the interest paid monthly, quarterly, annually or at maturity for most terms. A slightly higher interest rate may be offered if you choose to have your interest paid less often but your savings won’t compound as much as a result.
You have two options when it comes to term deposits for a child:
Which of these options you choose will depend on your child’s age. Some financial institutions do offer term deposits for kids from the age of 12 or 13, although this isn’t always the case.
1. Open a term deposit in trust for your child
Opening a term deposit ‘in trust’ for your child is the only real option if your child is aged under 12 years. In this case, the funds are held in your name, but you can specify when opening the term deposit who the funds are held in trust for.
This is an important distinction to make to ensure you don’t have to pay income tax on the interest earned on those funds. However, you’ll have to provide a tax file number (TFN) to the bank for your child so no tax is withheld by the bank. You can easily obtain a TFN for your child online through the Australian Tax Office (ATO).
It’s worth noting the ATO says that ownership of a term deposit (or any other form of savings account) is determined by who has control and use of the funds in that account. Be aware that if you withdraw money from your child’s term deposit to pay school fees, for example, you’ll be deemed to be the owner of the funds. In this example, you could receive a demand to pay tax on the interest earned on those funds over the years.
You can retain the child’s funds in a trust account until they reach 18 years of age, at which point you’re obliged to hand over control of those funds to the owner as soon as they reach 18.
2. Open a term deposit in your child’s name
This is possible once your child reaches 12 years of age, as there are a small number of banks and financial institutions who offer this option. The stipulation usually is that the child must be able to sign their own name consistently and have a basic understanding of what a term deposit is. If the account is purely in your child’s name, you’ll still have to provide your child’s TFN to ensure no tax is withheld.
The features you should look at when comparing term deposits for your child include:
Set and forget investment
You can take out a five-year term deposit and forget about it for the next few years, knowing the funds are in safe hands and earning a good rate of interest for your child.
Higher interest rate
The interest offered on a term deposit will almost always be higher than the rate offered on a high-interest savings account, so you can be confident you’ve got the highest interest rate possible for your child’s funds.
Funds locked away safely
Because term deposit funds aren’t available to be withdrawn (unless there are exceptional or emergency circumstances), you can rest assured your child’s funds are locked up safe, out of temptation’s way.
Can’t top up
If your child has a regular income you wish to invest, you won’t be able to top up the term deposit, as the investment is fixed until the end of the term you originally agreed to. However, nothing is stopping you from taking out a second term deposit.
No access to funds at age
If the maturity date doesn’t coincide with your child’s 18th birthday, they’ll have to wait until the term expires before gaining access to their funds.
Miss out on rate increases
If you invest your child’s savings for a relatively long term, such as five years, you could miss out on the opportunity to generate more interest if rates rise over that period.