City: Sorry, Spice; Girls, sorry Teletubbies, there; is a better; present for the future

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The Independent Culture
Spice Girl dolls will be fighting it out with the Teletubbies, and Lara Croft with Hercules and the latest crop of bloodthirsty video games for the lion's share of the actual presents for children this Christmas. But all those adults whose imagination freezes solid with the first distant jingle of sleigh bells can still give the children cash this Christmas, safe in the knowledge that it is a very acceptable alternative.

Put it into a savings account and you can convince yourself that it is an educational tool at a time when acquiring financial skills is increasingly important in the journey from the cradle to the grave. Savings accounts are also a lot better investments than they were this time last year. Base rates have edged up by 1.25 per cent over the past 12 months but the rates of interest offered on special savings accounts for children have risen significantly faster, and are usually significantly more than an adult would earn on a similar sum of money.

In many cases rates of return have doubled since last Christmas as banks and building societies look for cost-effective ways of building or defending their market-share. Children are taxpayers too, and are as much entitled to a tax-free personal income of pounds 4,045 a year as Grandpa and Grandma, so most children can earn interest free of tax if a parent or guardian signs form R85, obtainable from the bank or building society branch. Parents cannot sign it if they are simply diverting their own income through their children. But gifts from grandparents, uncles, aunts and unrelated friends can all qualify for the allowance.

According to Moneyfax, the Norfolk-based financial database, Nationwide Building Society's Smart 2 Save account for children under 12 is the best buy for small sums, paying 7.2 per cent with instant access on sums from pounds 1 upwards and the slightly more grown-up Smart Account open to children from 12 to 17 pays the same rate and throws in a plastic card which can be used to withdraw credit balances up to pounds 100.

Only 12 months ago these accounts were paying an average of 3.4 per cent, but Nationwide says it is consciously investing in its future customers and emphasising the benefits of mutuality which allow it to offer better deals for savers and borrowers. Smart account-holders also get a welcome pack and discount vouchers to visit places of interest.

Britannia Building Society offers 7 per cent on sums from pounds 1 upwards in its Firstsaver Account, rising to 7.25 per cent on amounts of pounds 500 upwards. Several local building societies offer attractive rates. Cambridge Building Society's First account pays 7.35 per cent on anything over pounds 1, although you have to live locally. Melton Mowbray Building Society's Sunny Bond pays 7.5 per cent on amounts between pounds 250 and pounds 2,500, although it requires 30 days' notice, and this is open to anyone, although unless there is a branch handy the account has to be conducted by post.

Most the best offers are variable rates and are liable to change. But you would have to rake together pounds 1,000 and lock it away for five years in a Natwest's Savings Bond to get the best fixed rate of 7.25 per cent a year.

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