Money Mensch: Don't piggy bank on it: parents' warning
Banks have done nothing to protect children's savings interest rates. These dismal deals don't just deprive kids of cash, but also of the valuable lesson that your money needs to work for you.
I want to show you how children can earn up to 6 per cent interest, grab freebies and allow parents to save tax-free too.
Do children pay tax?
Children are taxed in exactly the same way as adults. Everyone can earn up to £6,475 tax-free from salaries, savings or investments. However, most children, unlike most adults, don't earn close to this. As you would need hundreds of thousands in savings before the interest hits this amount, the vast majority can save tax-free.
If your child is an actor or entrepreneur earning more, the Inland Revenue will happily take its share. The only proviso is that any interest earned on money specifically given by a parent or step-parent (not aunt, uncle, grandparent or anyone else) is only tax-free if it generates less than £100 interest per parent. Give the child more and they pay tax on the whole amount at the parent's tax rate. This is done to stop parents dunking all their cash in their kids' names to save tax free. To ensure interest is paid without tax being deducted, fill out an Inland Revenue R85 form, which most children's savings accounts will give you.
The Best-Buy Children's Savings Accounts
There is a huge range of accounts, depending on circumstances, although under-16s cannot open
● Halifax's and Bank of Scotland's Children's Regular Saver pays a whopping 6 per cent AER, fixed for a year, provided you pay in £10 to £100 every month. Miss a payment or make a withdrawal and you get a paltry 1 per cent. After the year, the money is transferred into the bog-standard Save4it account, so do ensure you check the rate then is competitive. If not, you can ditch and switch.
While you would have £1,200 in it by the end of the year, don't expect to earn 6% interest on £1,200. This is because you drip feed the money in over a year, so actually the average balance is £600 and the interest earned will be roughly 6 per cent of that.
Top 'can't withdraw' rates
Many adults want their children to save somewhere they can't be tempted to take the cash out. The easiest is a fixed-rate savings account, as these require you to lock the cash away during that time. Yet do this, and if rates rise, your cash is locked in too, so you can't dump it for a better paying provider.
The Yorkshire and Clydesdale Bank's Child Savings Bonds pay 4.45 per cent fixed for five years. These must be opened for under-16s at one of their 340 branches.
For a shorter fix, Halifax's and Bank of Scotland's fixed-rate web savers have a range of deals paying up to 4.25 per cent. Anyone over 11 can open one. Top easy access account
Northern Rock's Little Rock children's account pays under-16s 3 per cent with easy access from £1. Again, you need to open it in a branch. The best online open account is Halifax and Bank of Scotland's web saver extra, which pays 2.6 per cent and can be opened online. It's not a child's account, but again allows over 11s to save with it.
It is also worth checking your local building society, as some of these do offer very good rates for children, but restrict them to customers living in the area. For a larger list, see www.moneysavingexpert.com/childrenssavings
Give children the responsibility of checking the interest rate regularly, and if it's no longer competitive, ditch and switch - a crucial life lesson.
Grab armfuls of freebies
Banks aren't stupid. They know if you get a child to open an account, many people will then stick with it throughout adult life. Therefore, doling out a free piggy bank or calculator to buy 40 years of profitable custom is cheap.
Focus on interest rate, not freebies, unless you are only putting in a small amount of cash, so that the value of the freebie outweighs anything else.
Better still, set up the best paying children's account then do your kids a great service by teaching them a bit of banking disloyalty. There's nothing stopping them opening a range of accounts using the minimum deposit, usually a quid, just to bag a freebie. Keep track of what you open, however, so they can still access the cash. Current freebies include the Nationwide's money-off vouchers, Cheltenham and Gloucester's alarm clock, Bank of Scotland's calculator and coin box - and there's more. See www.moneysavingexpert.com/kidsfreebies
Use your child tax efficiently
Using your child tax efficiently may sound callous, but if you are better off, then so are your kids. Saving money in a child's name will usually mean it is tax-free and often you can get a higher rate of interest.
They can earn up to £100 in interest from money given by each parent - currently that's around £6,000 (though go lower as interest rates may rise).
There is nothing wrong in having an account for them to put their pocket money in and another for you to put in any larger amounts. Yet if the money is in your child's name, it is their cash. If you are worried that they'll be tempted to splash out, don't be. Many accounts do allow the adult to stay in control of the cash.