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By Simon Bain and Naomi Caine
But many of the savings accounts for children and young people on offer in the high street show that banks don't treat them any better than they treat adults.
The terms and conditions of a children's account can be even trickier than those of adult versions. There might be restrictions on withdrawals, or a bonus that pushes up the interest rate, but only for a limited period. And try not to get too distracted by the various freebies.
Royal Bank of Scotland is 83% owned by the taxpayer and is keen to promote a new community-minded image. It has a typical kids' offering including a moneybox and a magazine for ages seven to 10, but the savings rate on offer is an underwhelming 0.5%. When the child turns 11, it's the Rainbow Savings account – but the rate doesn't improve. The Revolve account for up to the age of 18 does have a debit card, but the rate jumps by a feeble 0.05% to 0.55%.
Santander has two youth accounts, and one for the children of eligible customers pays an attractive 4.89%. But the rate drops to just 0.1% once £500 of savings are reached, which may make the free gift for opening the account look expensive.
Among the "ethical" alternatives, the Co-operative's two accounts pay just 0.25%, Triodos Bank offers 0.8%, and the Dunfermline building society, part of the giant Nationwide society, has two accounts with piggy banks and magazines, but pays only 0.75%. The Nationwide itself pays 0.75%, or 2.1% with 90-day notice, and has a one-year bond paying an unspectacular 2.25%.
Even with inflation falling last month to 2.4%, it still means youngsters' savings are losing value fast in these accounts.
So although it's a good idea to get children into the habit of saving from an early age, what kind of lesson are you teaching your little (or bigger) ones if you put their money into an account that pays a poor rate of interest?
Honourable banking exceptions are the Young Saver, paying 2% at Bank of Scotland but a far better 3% at Lloyds TSB in the same banking group – though only if the parent has a Lloyds TSB account.
The popular regular saver account launched by Bank of Scotland and still paying 6% is now available only in Halifax branches south of the Border. But out in front is Northern Rock's Little Saver, beating inflation at 3% with no strings attached. As with many accounts, the adult must be named as trustee, and this one has a limit of £10,000.
Clydesdale has this month launched two new kids' accounts. Jumpstart pays up to 0.55% (over £1000), similar to the bank's previous Cybersave offering though now throwing in free gifts and a "dual function" cashcard for over-11s, with parental consent. Headstart, says the bank, "allows parents to put away money to help towards the cost of going to university, buying a first car or home or just to give their children a financial helping hand". Like the Junior Isa, control of the account passes to the young person, though on their 17th not 18th birthday. But despite the innovations, the interest rate is nothing to write home about. The 2.5% headline offer includes a bonus of 1%, which means just 1.5% from October 2013, and there is also a 95-day notice period for withdrawals.
Alternatives are available from two mutuals. The Skipton's Leap account does have a 0.5% bonus, but the rate settles after 12 months at 2.25% and there are no other strings, while the Scottish Building Society offers the best regular savings account of its kind in the market. The uAccount for ages seven to 17 pays 4% on £10 to £100 a month, and allows one withdrawal a year – though the rate falls to 2% if fewer than 12 payments or more than one withdrawal are made.
The "best buy" tables show the (Welsh) Principality building society's Dylan Regular Saver Bond as the top-paying children's account. But while it pays 4.5% fixed for 12 months as long as you make a monthly deposit of between £10 and £150, this account then reverts to a feeble rate of 0.9%.
The Clydesdale's Child Savings Bond is a longer-term proposition. It is a five-year fixed-rate bond allowing just one deposit, and it is still paying 4.25% – a better rate than most regular five-year bonds on the market.
An adult will often have to open any account in the child's name and it may have an age limit of 16. You should fill out form R85 to make sure the interest on the account is paid gross. Watch out for the £100 rule, though. If the money in the account is given by a parent, any interest over £100 is taxed as the parent's own.
Anyone who is worried about a potential tax bill might want to consider a Junior cash Isa. You can put up to £3600 a year into a Jisa and the interest is tax-free. However, the money is locked up until the young person hits 18 – and then the accumulated pot passes to them. If that doesn't put you off, the rates on offer for Jisas are juicier than those in the kids' accounts market. Nationwide and Coventry (both paying 3.25%) and Skipton (3.02%) are a nose ahead of Bank of Scotland and Lloyds TSB (both 3%), while the tiny Scottish pays a game 2.6%.
Mandy Armes had no hesitation in opening savings accounts for sons Lucas, eight, and four-year-old Aiden with the Skipton Building Society. She and husband Matthew chose the Leap account, with a competitive rate and ready access, rather than the higher-paying junior Isa. She says: "I like the savings account, because if they did need anything we would be able to use it rather than break into other accounts." The couple pay in Christmas and birthday gifts and make other deposits too. "It is all there for future purposes," Armes says, adding that Skipton has been "honest and upfront" since she reviewed her savings four years ago and switched to them from her bank.
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