Giving children pocket money is a great way of teaching them the value of money and the benefits of saving. But with the average child receiving nearly £320 a year - and that's before Christmas and birthday money - it's well worth looking for a good savings account for your son or daughter, rather than them storing their cash in a piggy bank where it will earn no interest.
How can children start to save?
Most banks and building societies offer savings accounts aimed specifically at children. Many allow easy access and unlimited withdrawals although some may require notice, say 30 or 60 days, before a withdrawal is made.
As with accounts for adults, the interest rates paid on children's savings deals vary significantly so it's well worth shopping around. In most cases the parent or guardian of the child in question will operate the account - usually until the child reaches the age of 16.
The top payers on the market are the Halifax and Bank of Scotland Save4it accounts, which offer a rate of 5.55% with maximum investments up to £5,000. When opening the account, your child will also pick up a calculator and a money box. This account is available to children up to the age of 16 and can be opened in trust for a child under seven or in the child's name if they are seven or over.
This isn't the only good deal out there. The West Bromwich Building Society Acorn Regular Savers offers a rate of 5.50% for accountholders up to the age of 18 with maximum investments limited to £100 a month. This deal does include withdrawal restrictions as accountholders are limited to two withdrawals per year (up to March 31).
The Chelsea Building Society Ready Steady Save deal offers 5.45% interest and the maximum investment is £20,000. Cash can be withdrawn as often as you wish (though for amounts higher than £500 a cheque will be required) and for children under the age of 10 it can be opened by a parent or guardian.
The Yorkshire Building Society Freedom and One Day accounts both offer 5.40% in-credit interest. The One Day account offers instant access, giving you the freedom to withdraw money for your child without notice and with the Freedom accounts it's possible to set a limit to cash withdrawals. The Freedom deal is available for children aged 12-20, whereas the One Day account is available from birth to 20.
Remember, that children have the same tax allowances as adults. The allowance for the 2008-2009 tax year allows individuals to earn £5,435 before having to pay tax. Given that most children will not earn more than that, and therefore won't be taxpayers, they can have their interest paid gross by completing an R85 form.
However, if a parent is paying into an account in their child's name and it generates more than £100 a year in interest, that interest will be treated as the parent's and taxed accordingly. The £100 rule, as it is known, applies only to parents so there is no need to worry if you are a grandparent, friend or other family member and are saving for a child.
What about child trust funds?
All children born after September 1, 2002, are eligible for a child trust fund (CTF). This is a Government-backed scheme aimed at encouraging parents to save for their son or daughter's future.
They receive a voucher worth at least £250 from the Government - those from lower income families receive £500. They then receive another voucher at the age of seven.
As well as the contributions from the Government, parents, grandparents and other friends or family can invest an additional £1,200 a year tax-free. Investing extra in a CTF can therefore be a good option for Christmas and birthday money your child receives, although the money can't be accessed until he or she reaches the age of 18.
There are three types of CTF - a stakeholder account which invests in equities in the early years but is gradually moved into less risky assets such as cash and bonds as the child nears the age of 18, cash savings accounts and non-stakeholder equity accounts.
If you are looking for a cash CTF, the Hanley Building Society CTF offers the highest rate at 7.75%. However, this is only available via branches so unless you live in the north Staffordshire area it may not be a viable option.
There are a number of other accounts paying more than 6% interest, although these are also from small building societies including Chorley, Shepshed and Cambridge.
If you would prefer an account from a bigger provider, Nationwide's CTF pays 5.50%, although there is an additional one percentage point bonus if £240 or more is paid into the account each year - this takes the rate to 6.50%. This account is available online or through branches.
Other alternatives include Yorkshire Building Society's CTF which pays 5.85%, although this includes a 12-month bonus of 0.70 percentage points so the rate will drop to 5.15%, and Britannia building society's CTF paying 5.75%. If you'd like to compare more rates use the savings account comparison tool and select the 'child trust funds' option.
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