The Best Children's Savings Accounts

If you want to save a regular monthly cash sum for your child, where's the best place to put the money?

This article contains out of date information - for the latest children's savings options please read our guide. 

A few months ago I opened Halifax Children's Regular Saver accounts for my two young nieces. It was an easy choice to make because it pays a whopping 10% for a year.

The Halifax is the highest paying account for kids at the moment and you can save between £10 and £100 a month but there are conditions. At the end of the year and every subsequent year, the capital and interest is transferred to an alternative instant access account called Save4it which pays 4.8%, not a bad rate in itself although there are better. However, if you miss a payment during the year or close the account before the year is up, the interest plummets to the lower rate for all the money you've already saved.

Children's savings account operate like ordinary savings accounts although before the age of seven the account must be in the parent's name with the child's initials attached. It's important to note that any contributions to the account by the parents which generate interest of more than £100 a year each will be treated as parental income and will result in the relevant parent paying tax on it.

However, interest earned on contributions made by the child or friends and relatives is not subject to this rule. Children have their own personal allowance in the same way as adults do so as long as any income doesn't exceed the allowance (currently £4,035 for the 2006/07 tax year), it'll be received will be free of tax. To that end, parents should make sure they ask for Form R85 when opening an account for their child to ensure the interest is automatically paid tax-free.

According to Moneyfacts, alternatives to the Halifax Children's Regular Saver account include a three-year savings bond with Scarborough Building Society which guarantees to pay 1% above the base rate therefore attracting an interest rate of 5.75%.

The Bank of Scotland and the Halifax both offer monthly savings accounts for the under-21s which pay 5.3% while West Bromwich Building Society pays 5% on its Acorn Regular Saver account.

Of course, if you're saving for the long term for your child, the stock market is really the best place for your money.

> Compare savings accounts for kids (and adults!) here at the Fool.