Parents: Make 10% A Year!

Parents, other relatives and family friends who want to save money for children can earn up to 10% a year in these safe savings accounts.

Sir Winston Churchill once remarked, "Saving is a fine thing. Especially when your parents have done it for you."

Alas, as I recently revealed in Where Have All The Savers Gone?, saving appears to be a deeply unfashionable habit nowadays. Indeed, the savings ratio (the proportion of our take-home pay which we save) is just 2.1% -- its lowest level since 1960.

However, thanks to five quarter-point rises in the Bank of England's base rate in the space of a year, the interest rates paid by savings accounts are the highest they've been since the turn of the century. Indeed, anyone aged eighteen or over with £250 to spare can earn a handsome 6.30% AER before tax in a Best Buy Icesave easy-access savings account. Not bad, eh?

Today I'm not going to go into any more detail about savings accounts for adults. Instead, I'd like to look at the best savings accounts for children.

The good news is that there is a wide choice of children's savings accounts to suit all circumstances. In order to make things easier, I'm going to split the Best Buys into three sections. Here we go:

BEST BUY CHILDREN'S SAVINGS ACCOUNTS

Child Trust Funds (CTFs)

In effect, a Child Trust Fund is a tax shelter for children. Every child born after 31 August 2002 is entitled to have a CTF, which comes with an initial government contribution of £250 (£500 for low-income families). The government will pay a further contribution of £250 (or £500) when a child turns seven. In addition, parents, other relatives or friends can contribute up to £1,200 a year into a CTF until the child reaches eighteen.

There are three types of CTF:

A savings account, which earns tax-free interest.
A stakeholder account, which invests in funds that buy shares in a range of companies. This account must not charge an annual fee of more than 1.5%, and the minimum extra contribution is £10.
A shares account, through which you can buy shares in individual businesses.

My daughter, who was born in 2003, has a shares CTF into which I pay £1,200 a year to invest in companies on her behalf. Despite the superior returns generated by shares in the long term, most parents have opted to open savings CTFs for their children. So, let's take a look at the pick of this cash crop.

1. Best Buy savings CTFs

*Provider*	*Interest* *rate (% AER)*	*Notes*
Hanley Economic BS	8.00	Only open to people living within 25 miles of HEBS's head office at Festival Park in Stoke-on-Trent.
Britannia BS	7.50	Rate includes 1.25% bonus for two years. Rate guaranteed to at least match base rate until 06/4/10.
Yorkshire BS	7.30	Rate includes 0.70% bonus for a year. Rate excluding bonus guaranteed to at least match base rate to 31/01/08 then be not more than 1% below base rate.
Shepshed BS	7.25
Skipton BS	7.00
Chorley & District BS	6.85

Source: Moneyfacts

Young savers in Staffordshire and South Cheshire can enjoy an interest rate of 8% on their CTF savings, which is a top-notch deal. Elsewhere in England, I like the Shepshed BS and Skipton BS CTFs, as I'm not a big fan of accounts with introductory bonuses. By the way, I'm delighted to see that this list is occupied entirely by building societies, which continue to fulfil their long-established role as the guardians of our nation's savings!

Sadly, in common with most children, my six-year-old son doesn't qualify for a CTF, as he was born before 1 September 2002. Therefore, some of his cash goes into one of the Best Buy non-CTF savings accounts shown below (but the vast majority is invested in the stock market, as you'd expect!):

2. Best Buy children's savings accounts (high street)

*Account*	*Interest* *rate (% AER)*	*Notes*
Halifax/Bank of Scotland Children's Regular Saver	10.00 (Fixed)	Regular-savings account lasting one year. Save £10 to £100 a month for a year, with no withdrawals.
Yorkshire BS Treasure Bond	6.50 (Fixed)	Rate fixed until 31/10/08. Minimum deposit £100.
Chelsea BS Ready Steady Save	6.20	Instant-access account. Minimum deposit £1.
Yorkshire BS One Day	6.15	Instant-access account. Minimum deposit £10.
Halifax/Bank of Scotland Save4it	6.05	Instant-access account. Minimum deposit £1.
Nationwide BS Smart	6.04	Instant-access account. Minimum deposit £1.

Source: Moneyfacts

Now a quick word about income tax as it relates to children's savings accounts. In theory, the interest paid by the above accounts could be taxed. In practice, few children earn enough interest to pay tax on their savings interest.

For the record, a child can earn tax-free interest of up to £100 per tax year on savings donated by a parent (so that's £200 for two parents). Also, interest earned on cash gifts received from anyone other than a parent usually falls within a child's personal tax allowance (£5,225 in 2007/08). Thus, it makes sense to keep parental gifts separate from cash donated by other people.

Finally, let's look beyond the big high-street providers for other table-topping children's savings accounts:

3. Best Buy children's savings accounts (other)

*Account*	*Interest* *rate (% AER)*	*Notes*
Nottingham BS Children's Regular Saver Issue 3	7.50 (Fixed)	Regular-savings account lasting one year. Save £10 to £150 a month for a year, with no withdrawals.
Chorley & District BS Foxley Fund	6.85	Minimum deposit £1. Maximum deposit £1,200 a year. Matures on 18th birthday. Similar to a CTF, but without the tax shelter.
Harpenden BS 18 Club	6.19	Minimum deposit £1. No withdrawals until 18th birthday.
Saffron BS Ladybird	6.00	Instant-access account. Minimum deposit £1.

Source: Moneyfacts

I've only listed four accounts in this final table, as these all pay 6%+ a year, which is where I've drawn the line.

So, there you have it: a range of children's savings accounts paying interest rates between 6% and 10% a year. Why not open one for your favourite youngster today?

More: Find a superior savings account today | Make The Most Of Your Savings | Simple Savings, Great Rates!