Three great ways to save for your kids

We highlight a host of savings accounts to fill the Child Trust Fund gap.

Now that Child Trust Funds are a thing of the past, many people will be looking for new ways to save for their children and grandchildren.

The good news is there are several options open to you. Here, I’m going to highlight some of the best savings options for those wanting to build a nest egg for the next generation.

The current economic climate means it’s almost impossible to predict what savings rates will do in the next couple of years. If you choose an account that locks your money away for the long-term, it’s quite possible savings rates will rise and your rate will be left far behind.

Because of this, I’ve focused on accounts that lock your cash away for a year or less.

Cash ISAs

Children can't open their own cash ISA until they reach 16. But if you haven't already used up your ISA allowance, you could open one to start saving for their future now. The main plus point about ISAs is, of course, their tax-free status. Current cash ISA rates may not seem that impressive; but when you compare them to (taxed) savings accounts paying higher rates, you'll find they’re pretty hard to beat. This article explains why cash ISAs offer such good value for money.

If you already have a Nationwide current account, the building society’s e-ISA might be a good choice. It offers a decent variable rate of 2.75% AER (including a 1% bonus until 30th June 2011) and you can open it with just £1.

The Nationwide e-ISA also allows transfers in from previous years’ ISAs; and it won’t penalise you for transferring money out.

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Save for your child's future

The sooner you start saving for your child's future the better. Starting early will give you the best chance of giving them a great financial head start in life.

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If you’re not a Nationwide current account holder and you still want transfer flexibility, another good option is the ISA Extra from Birmingham Midshires. This account offers a variable rate of 2.7% AER (including a 1% bonus for 15 months), allows transfers in from previous years’ ISAs, and won’t penalise you for transferring money out.

Just be aware that you’ll need at least £500 to open the account.

If you’re not looking to transfer ISA money in - and you’re willing to leave the cash alone for a full year - you’ll get a higher, fixed rate elsewhere. The 1 Year Fixed Rate ISA (3) from Coventry Building Society pays 3.25% AER until 30th May 2011.

However, you’ll be sacrificing flexibility to get this rate. You can make just one deposit (which has to be the full £5,100 allowance); you can’t transfer money in from previous ISAs; and you’ll lose 120 days’ interest if you make any withdrawals during the year.

Fixed rate bonds

If you’ve already used up your ISA allowance - and you still have a lump sum to stash away - a fixed rate bond may be the account for you. At the moment, accounts from two little-known banks top the one year bond category.

The first is the Fixed Deposit account from United National bank. This pays a very healthy fixed rate of 3.25% AER for the year-long term. On the downside, you’ll need a fairly substantial sum to get you started: The minimum deposit is £2,500.

My second choice is the Fixed Deposit Account from Punjab National Bank (International). This account also pays 3.25% AER for the year, and can be started with just £1.

These banks may not be household names, but both accounts are protected by the Financial Services Compensation Scheme.

Regular savings

Many people won’t have a lump sum to stash away, but will be saving for their kids from scratch. If you want to start small, a regular account could be an excellent choice for you.

Regular savings accounts usually last for a year, and require you to save a certain amount (within certain parameters) every month. In return for this commitment, you’ll receive a very good rate of interest.

Just bear in mind that most regular savings accounts don’t offer much flexibility. If you think you may need to get your hands on the cash at short notice, you may want to go for an instant access savings account instead.

One of the highest-paying regular savings accounts currently on the market is the Norwich & Peterborough Building Society Family Regular Saver. It offers a rate of 5% AER (fixed for a year) and allows you to save £1 to £250 per month.

It’s exclusive to families with dependent children up to 16 years of age (or 18 if they are in full-time education). And be aware that 3% of that juicy rate comes in the form of a bonus, which you’ll only get if you save every month for 12 months, and make no more than one withdrawal a year.

Recent question on this topic

• toyraman asks:

  As govt stopping ctf, what happens to my existing child trust fund account?

  • 
    SoftwareBear answered "your child can use it when they are 18 to pay off some of the national debt ... or some lollipops..."
  • 
    MikeGG1 answered "We have still to get the details but they have also said that they will be saving on the cost of..."
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There’s also a good account aimed specifically at saving for children: The Children’s Regular Saver from Halifax pays a whopping 6% AER (fixed for a year) and any adult can open one of these accounts on behalf of any child.

On the downside, the amount you can save is relatively small - £10 to £100 per month - and this isn’t a flexible account: Any missed payments or withdrawals will result in the money being moved to a Save4It account, which pays a variable rate of just 1.05% AER.

However, several adults can each open one of these accounts for the same child; so if a few of you get together, the savings can really build up.

And this account offers a positive tax angle, too. An account opened in a child’s name is tax-free, providing the child doesn’t earn enough to pay tax!

More: Avoid these eight savings accounts! | Top savings tips for the over 50s