Earn up to 6% with a Junior ISA!

You may not be able to make a lot of interest on your cash, but your kids certainly can - find out how.

My friend has recently had her first baby, and revealed how shocked she was at the amount of money her daughter had already received from family and friends.

They’re a pretty sensible bunch if you ask me – when all of her baby friends have outgrown their expensive baby gifts, my friend’s daughter will have a healthy savings pot to help her start out in life.

And of course, by saving or investing the cash now she can also benefit from the miraculous effect of compounding!

So where could my friend save her daughter’s cash?

Child Trust Fund

Well, sadly she is too late to open a Child Trust Fund (CTF) with the government’s £50 voucher, as the scheme was finally scrapped this year.

But for those who do have a cash CTF, here are the best cash accounts on offer at the moment.

Top Child Trust Fund Savings Accounts

Account	Rate (AER)	Conditions
Yorkshire BS	3% (inc. 12 month 0.7% bonus) on balances of £50+	Must be opened in branch or by phone and operated by branches.
Skipton BS	2.65%	Apply by post or in branches

Junior ISAs

Fortunately, there will be a new option to replace the CTF – Junior ISAs. These accounts will allow under-18s who do not have a CTF the chance to save up to £3,600 each year, with all income or gains received, tax-free.

And to be honest – while missing out on the free money is annoying, the Child Trust Fund was riddled with issues. The Junior ISA appears (at the moment at least) to offer a lot more flexibility and will automatically turn into an adult ISA when the child turns 18.

Unfortunately, they are not due to be launched until 1 November 2011.

But don’t panic – there are actually some pretty good, bog-standard children’s savings accounts and bonds available that pay a decent rate of interest, tax-free. And as children have the benefit of time on their side, they can consider longer-term accounts, too.

Top Children’s Savings Accounts

Account	Rate (AER)	Min-max deposits	Term	Conditions
Halifax Kids’ regular saver	6%	£10-100 per month	12 Month Bond	Must be 0-15 years old. No withdrawals. Balance will be transferred to easy access account after 12 months. Apply in branch
Principality BS Dylan’s Regular Saver Bond	4.5%	£10-£150 per month	12 Month Bond	Must be 0-15 years old. No withdrawals or missed payments. Balance will be transferred to easy access account after 12 months. Apply in branch.
Yorkshire Bank Child Savings Bond	4.25%	£50-£250k	5 Year Bond	No further deposits can be made after initial deposit
Leeds BS Young Investor Fixed Rate Bond (issue 2)	4%	£100 - £1m	5 years	Can withdraw 25% without loss of interest
Northern Rock Little Rock Fixed Rate Bond	3.3%	£1-£20k	2 years	Must be under 16 years old.

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As you can see, the Halifax account tops the table, paying a very healthy 6%AER.

But be aware, both this, and the Principality BS account are regular savings accounts, meaning that you will need to commit to paying in £10-£150 each month and not make any withdrawals. Plus, you’ll need to be prepared to move the cash in a year if the easy-access account offers a poor rate of interest (which is highly likely).

As a regular saver it also means the maximum you can invest is £1,200 or £1,800 respectively, and that is drip fed over the whole year. But, interestingly, as up to five other people can also open one of the Halifax accounts for your child this could be boosted to £500 per month – or £6k over the year.

If your child has a lump sum to save the Yorkshire bank account could be suitable, paying 4.25%AER. But as it’s a five-year bond this may be better for younger savers who won’t need their cash in a hurry.

£500 lump sum

But if you’re looking for somewhere to stash £500 or less, Bath BS has its Futurebuilder savings account, paying 5% AER on balances of £1-£500. You can save up to £15k in this account; however balances over £500 will earn a mere 1.1%AER.

And for those who just want an easy access savings account, Northern Rock is offering the Little Rock Access account, paying 3% AER.

Tax

So as you can see, there are quite a few good options for my friend’s baby. But remember, in order to receive gross interest, parents must fill out a form R85.

Indeed, with children’s accounts earning such healthy rates of interest it may be all too tempting to stash some of our own savings in our child’s name.

£100 Rule

But be aware – if a ‘gift’ from a parent earns more than £100 per year in interest, the whole of the income may be taxed as the parent’s income. This rule applies separately to each parent.

For example, say I gave my son £2k, which earned £98 in interest over a year. This interest would be classed as my son’s and as it is under £100, the account could be registered for gross interest.

But if this £98 is then added to my child’s account, which then earned £101 the following year, it will have broken the £100 limit, and would thus be classed as mine for tax purposes – meaning that it can no longer be registered for gross interest.

So there you have it, some great options for your kids to make their money work harder.

Happy saving!

More: The 10 best cash ISAs | New cashback card shakes up the market

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