Earn 6% on children's savings

The savings market may be pretty dismal for you, but things are looking up for your kids.

If you’re desperately trying to build a nest egg for your children’s future, the rates on offer over the last few years must have been a little disheartening. Where’s the incentive to save when the returns on cash are so appalling?

But, luckily, the top children’s savings accounts aren’t anywhere near as dismal as you might imagine. In fact, it’s possible get guaranteed rates on kids' savers which are higher than any other account available in the traditional savings market right now.

With that in mind, here’s a summary of the most competitive children’s savers:

Top children’s savings accounts

At the top of the table, the Halifax Children’s Regular Saver pays a fantastic rate of 6% which is fixed throughout the 12 month term. If you’re looking to drip feed money into an account for your kids, this could be the perfect choice, as you can to save between £10 and £100 a month. Even better, it’s the only account of the selection which can be operated online so it gets top marks for convenience too.

It's not just parents who can open the Halifax Children’s Regular Saver on behalf of a child - grandparents, other relatives and friends can do so as well.

But, of course, there are a couple of catches you need to watch out for. Firstly, you won’t be able to make any withdrawals during the 12-month fixed rate period. So, you should only choose this account if you can keep the commitment up. If you miss a payment in any month you won’t be able to make it up later on which will restrict the maximum amount which can be held in the account.

At the end of the term, your child’s savings will be automatically moved over to an easy access savings account, where the monthly standing order payments will continue unless you instruct Halifax otherwise. It's likely that the rate paid on the easy access account won’t be competitive, so you'll probably need to switch your child’s savings at this point.

Lump sum savings

If you have a lump sum to save, or more to put away regularly than the maximum £100 monthly deposit, consider taking out one of the other accounts in the selection as well as the Halifax Children’s Regular Saver. The Bath Building Society Future Builder is a good choice if instant, penalty-free access is likely to be required. But the great 5% rate is variable and only applies to the first £500. Balances over this amount will earn just 1.1%.

If you want to save a reasonably large amount the Northern Rock Little Rock Fixed Rate Bond allows deposits of up to £20,000 and pays a competitive fixed rate of 3.75% until 1 September 2013. But bear in mind withdrawals aren’t permitted during the term, and top-ups can only be made while the bond is still available to new customers. This account is a limited issue which means it can be withdrawn from the market at any time.

For smaller lump sums of up to £1,800, the Principality Building Society Dylan’s Regular Saver Bond is an even better option paying 4.5% fixed for the next year. Again note the withdrawal restrictions which apply during the term.

High-interest current accounts

If you’re keen to maximise your own savings, no doubt you will have already across the many articles we have written on boosting your rate using a high interest current account. If you have already taken out one of the market-leading current accounts from Santander, your children’s savings can also benefit by taking out a Santander current account themselves if they're a bit older.

For example, the Santander 11-15 Current Account pays a rate of 3% variable on balances up to £500, but the return steps up to 5% if you have your main current account with Santander too. To qualify, a payment needs to be credited to the account every month. But don’t forget no interest is earned on balances over £500 so make sure the account doesn’t exceed this limit.

There’s also a version of the account for older children - the Santander 16-18 Current Account - which works in exactly the same way and pays a rate of 5% if you, as a parent or guardian, have a Santander current account which is your primary account. To qualify for this rate at least £50 must be paid in every month.

Tax tip

So now you know where the best savings accounts for children are to be found, here’s a quick final tip on tax.

Most children don’t earn enough income in their own right to pay tax on their savings. In other words, their income is below the personal allowance of £6,475 which everyone under 65 can earn without paying tax.

If your child’s earnings are less than this amount, you should register to have interest paid on theirsavings accounts tax-free. You can do this quite easily by filling out form R85 and sending a copy to every bank or building society where your child has savings. This form will ensure the interest earned is paid gross.

But from the 6 April after your child reaches 16, tax deductions will automatically begin unless they re-register to continue earning gross interest (assuming their income is still below the personal allowance). Don’t be surprised if the bank doesn’t provide any prior warning!

This is a classic article that has been updated for 2011.

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