Smart Banking For Kids

Sydney Morning Herald

Wednesday September 5, 2007

By Michelle Innis

It pays to choose wisely when setting up an account for the offspring.

When it comes to children's bank accounts, many parents chose the bank that offers the greatest convenience - usually their bank.

But according to Andrew Willink, executive chairman of interest rate monitoring firm RateCity, that's the one thing you should not do.

"Make sure the account is in their name and bears no relationship to your account," Willink says. "If I had a Westpac account, I would open an account at the Commonwealth Bank for my children.

"Kids like to be different from their parents and they need to manage their own money."

Willink has one other piece of advice for parents: if your child is saving for a particular thing, let them buy it when they reach their saving goal.

"They should be able to decide how they spend their money as long as it is not harmful or X-rated," Willink says. "It's all part of the process."

So, once you've decided that your child can have pocket money and should have a bank account, what do you look for? And how do you go about opening a bank account for an underaged banker?

Most banks require the parent to front up to the bank branch or a post office with the right documents before an account can be opened for a child.

The parent or guardian needs to provide official documents to meet the bank's 100-point identity check and may also be asked for a copy of the child's birth certificate or passport.

The child might get signing rights to the account or those rights might sit with the parent or the guardian depending on the bank. When it comes to selecting an account, Cannex financial analyst Jeremy Ooi says children's savings accounts should be free from fees because otherwise the small amount of money most children save each month would be quickly diminished.

Accounts should also offer easy access. Children should be able to see their savings building, either in a statement, savings book or on the internet.

The best accounts should also encourage children to save by offering good rates of interest. Many banks have special savings accounts for children, but only a few provide good deals when it comes to interest rates that will boost their savings.

"What accounts should do is encourage children to build their savings," Ooi says. "They should encourage children to put money aside regularly, say every month."

Bendigo Bank issues savings books and runs a banking program through primary schools.

The chief general manager of retail and distribution, Russell Jenkins, says the bank opens 1700 accounts each month for children. It has more than 100,000 children's accounts.

The bank offers a very low rate of interest for young savers, but it has a program to encourage under-13s to put money away regularly.

"The program can be run through schools, kids can deposit money through the school or at a branch, which means they can bank regularly," Jenkins says.

Part of the program includes birthday cards and small gifts that encourage kids to think positively about their local branch. However, the interest rate on the account is low at 1.5 per cent.

BankWest offers a dismal 0.01 per cent initial rate of interest on its savings account for children. The interest rate rises to 10 per cent if certain conditions are met. Children must deposit between $25 and $250 a month into the Kid's Bonus Saver account. If any money is withdrawn during the month, the bonus rate of interest is not paid. The rate reverts to 0.01 per cent.

Once a year, the money is swept back into the children's transaction account where it attracts interest at a rate of 3 to 5 per cent for amounts from $1 to $10,000.

Westpac also has fee-free banking for children through its Choice Youth package. But the best interest rates mean linking the transaction account to an internet savings account like the Max-i Direct account. Westpac's Choice Youth package allows unlimited banking transactions at Westpac branches, ATMs, over the telephone and the internet.

National Australia Bank has the Smart Junior Saver, which offers fee-free banking for children, plus bonus interest if no withdrawals are made during a month. The initial interest rate is 2 per cent but an extra 3 per cent is earned if money is deposited into the account and no money is taken out.

If your child is an excellent saver and qualifies for bonus interest, then beware the Tax Office, says Centric Wealth financial adviser Dean Easterby.

If a child earns more than $417 in interest in a year, the Tax Office will take 66 per cent. If earnings rise to more than $1308 a year, that rate falls to 45 per cent.

"That's something to be aware of," Easterby says. "But early on, it should be about getting into good patterns with banking and building savings, and less about the rate of interest and tax."

© 2007 Sydney Morning Herald

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