Saving For Children: Curtain raisers for a sound financial future

In the second of a three-part series, we look at accounts giving young children responsibility for their cash

You may lament your own lack of savings discipline, but that doesn't mean your children can't do any better.

You may lament your own lack of savings discipline, but that doesn't mean your children can't do any better.

Persuading your offspring to put some of their pocket money - as well as cash received for birthdays or Christmas - into a special account will help develop a savings habit early in life.

And given the paucity of financial education in many schools, anything that helps youngsters get a grip on money matters has to be encouraged.

There is no minimum age at which a children's account can be opened, although most pro-viders require a parent to open and run the account in their own name until a youngster is at least seven years old.

"Children's savings accounts work in a similar way to adult accounts," explains Anna Bowes from independent financial adviser (IFA) Chase de Vere. "There is just as wide a variety, including easy access, fixed rates and regular savings. The rates are also on a par with adult savings accounts, although there tend to be less bonuses."

You can usually open these accounts with as little as £1, and for children aged seven to 11, there are more than 160 on offer.

It's easy to be tempted by the freebies that come with them, ranging from colourful rucksacks to calculators, money-off vouchers and piggy banks. But while your child's choice may be based on the gifts up for grabs - and, to be fair, saving at an early age needs to be seen as fun - don't be too easily swayed. Look beyond the marketing hype to unearth the best rates.

"The market for children's accounts is changing because providers know there is money to be made from parents looking to invest for children," says Stuart Glendinning from finan- cial products price-comparison website moneysupermarket.com. com. "Providers are moving away from simply offering freebies and gimmicks, and are now combining these with more competitive rates."

Parents seeking an account for their children must look further afield than their own provider, he adds. They should be able to find one paying more than 5 per cent on savings.

But be aware of any penalty payments. For example, while the Halifax's Monthly Saver children's account pays a respectable 5.55 per cent, your youngster will have to put away at least £5 a month. If they miss more than one payment, they will lose 2.75 per cent of the interest rate. Furthermore, only one withdrawal from the account is permitted in a year.

For instant access without penalty, Ms Bowes picks out the Ladybird account from Saffron Walden building society, which pays 5.35 per cent on balances of £1 up to the age of 16.

Mr Glendinning likes Nationwide's Smart account and the Save4it deal from the Halifax. The former can be opened with £1, pays 5.01 per cent half- yearly and offers a cash card once your child is 11 years old.

Don't worry too much about the plastic; like other providers of junior cash cards, the building society will not allow its young customers to go overdrawn and will impose daily limits on withdrawals (£100 in Nationwide's case).

The Halifax's Save4it account also offers instant access and pays the slightly higher rate of 5.05 per cent.

If accessibility is not an issue, the Scarborough building society savings bond pays 5.75 per cent a year. Children must save £5 a month and the cash is locked out of reach for three years.

While rates are important, they are not everything: giving your child a sense of responsibility for their money is just as vital. For convenience, many children's accounts are opened and operated by post, but try to get children used to going into a bank or building society to make deposits and withdrawals.

To foster a mature approach to money, choose at the very least an account with a passbook to allow your child to keep track of their financial transactions, and to start to understand how saving works.

Remember, too, that all children have their own personal income tax allowance. This means their money will be tax-free as long as - like everyone else - they do not breach the annual allowance (currently £4,745 and rising to £4,895 in the next tax year starting on 6 April).

To make sure the interest earned is paid into their account without tax deducted, you need to fill in an R85 form - available from banks, building societies and tax offices.

Once the account is set up, you may want to add to it yourself - but tread carefully. If annual interest earned from your own contributions to your child's account tops £100, it will be taxed at 20 per cent basic rate and deducted from your child's account. This problem can be circumvented, of course, by asking friends and relatives to make contributions, since all interest is then tax-free.