A piggy bank is good, a passbook even better

Continuing our series on how to invest for children, Sam Dunn looks at savings accounts suitable for seven- to 11-year-olds
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The Independent Online

Freebies are usually a frivolous part of any financial product - tempting but best ignored in the hunt for good rates.

Freebies are usually a frivolous part of any financial product - tempting but best ignored in the hunt for good rates.

Yet when it comes to savings accounts for youngsters between the ages of seven and 11, a free piggy bank and a height and savings chart can be invaluable, helping to encouraging habits of thrift.

"For a child, saving has got to be fun - you don't want them to be worried about money," says Anna Bowes of independent financial adviser (IFA) Chase de Vere.

"Of course, from an adult's point of view, finding a good rate of interest on a savings account is more important."

This is true, no doubt, but getting your child to want to save money will be the bigger challenge. Never ones to miss a financial trick, high street banks and building societies are happy to help parents do just this. A growing number offer young saver accounts that combine the vital "fun freebies" children enjoy with a grown-up rate of interest.

At the very least, children should be given a passbook. As they log each deposit and withdrawal, they will grow to appreciate the benefits of saving and develop a sense of how money works.

It could be worth looking further than your own bank for a young saver account, as there is a big difference between what lenders have to offer. Some have high interest rates and giveaways, while others make children more responsible for their own money.

One of the UK's most popular children's accounts, and also one of the best deals available, is Nationwide's Smart account. It comes with plenty of goodies, including money-off vouchers for Legoland, theme parks and the BBC shop, and pays 4.75 per cent interest on savings.

Nationwide is one of the few lenders to offer a cash card to children aged 11 and upwards. Account holders can also use the internet to monitor their savings and transfer cash to other Nationwide accounts.

The building society recommends children take control of their money at an earlier age. "We write to parents when their child is seven to encourage them to put the account in the child's name," says a Nationwide spokeswoman. "They can then withdraw money by themselves."

Not all providers are as generous with their interest and freebies. Barclays is particularly mean-spirited; there are no giveaways and it pays just 2.5 per cent interest until your child has built up £50 in savings. The rate then rises to as high as 4.5 per cent on more than £1,000 savings. If children choose to save with Britannia building society instead, they will earn the same rate of interest (4.5 per cent) on as little as £1.

Even better, get the kids to Alliance & Leicester, which pays 5.25 per cent on balances as low as £1 in its First Save account.

Free moneyboxes are a predictable choice for freebies. At HSBC, young savers get a safe-shaped moneybox when opening a savings account. The bank pays 4 per cent interest on a minimum balance of £10.

At Lloyds TSB, the moneybox takes the form of the bank's iconic black stallion. Its young saver account pays 4.43 per cent interest on balances of £1 upwards. However, Lloyds TSB is less keen than some of its rivals to give children responsibility for their money, insisting that an adult remain in charge of the cash until the child is at least 11.

Even if you do want to foster a grown-up attitude to saving, you might not want your child to be able to withdraw cash from their account without your knowledge. Check the bank's policy on this. Most providers will restrict the amount your child can take out; for example, Nationwide imposes a £100 daily limit on both its card and its passbook.

Many parents will want to chip in themselves to give their children a head start with their savings. But it doesn't always pay to be generous, warns Ms Bowes. Thanks to IR85, a form available from all banks, building societies and tax offices, your child won't pay tax on their interest. But if the interest generated from your own contribution to your child's account is more than £100 a year, it will be taxed at a basic rate of 20 per cent and a sum deducted from the account.

One way round this problem is to ask grandparents, godparents and generous friends to contribute to your child's account, for example on birthdays and at Christmas. All interest will then be tax free.

Next week: saving for teenagers

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