This Christmas, give a present with real value: A child savings account

Starting a saving account for a child this Christmas could have a big impact long after the flashy toy or video game that you could have bought instead is forgotten. You could be setting the foundations of a savings pot which could see them on to the property ladder, pay crucial college fees or help them more easily tackle life's bumps and knocks. It can also teach them the value of money.

"If you show children how to save, whether it's using their pocket or birthday money, they will be learning how not to get into debt and you will be encouraging good habits. Presents can be expensive, so you will be showing them how to save up for them," said Michelle Slade from financial advice website Moneyfacts.co.uk.

Some of the interest rates on offer from children's savings account providers are still far higher than the Bank of England base rate, currently at 3 per cent, Ms Slade said. "With children's accounts, the best rates are fixed term. The Halifax is offering 10 per cent for a one-year bond."

Among instant-access accounts tailored to children, the highest paying is from the Chelsea Building Society. At 5.45 per cent on balances over £1 it compares well to most instant access accounts available to adults. An even higher rate is available to those willing to make regular contributions. The Nottingham Building Society Branch Only Child saver is currently paying 7.5 per cent to regular savers until December 2009.

Children's savings also enjoy tax advantages not open to adults unless they have their money in a cash individual savings account (ISA). Usually, saving interest is taxed at a rate of 20 per cent. The tax is deducted on the interest before it's paid by the bank or building society. To stop this happening to a child's account, parents have to ask the bank or building society for Form R85.

But there are tax implications for child savings. If you're a parent or step-parent and the money you give your child earns more than £100 interest a year, this interest will be taxed as if it were your own. Likewise, any money you give to a child may still be considered part of your estate for seven years. Die within that period and inheritance tax may be due on the money.

Government-backed Child Trust Funds are the tax-free vehicle of choice for savings. Every child born since September 2002 has received a £250 CTF voucher with an additional payment promised at age seven. The parents get to decide where the CTFs are invested or, if they choose to do nothing, the initial £250 voucher will be invested on their child's behalf by Revenue & Customs. Family members can top-up the CTF with regular or single payments, up to £1,200 in a year. Fund choice varies from deposit savings accounts to stockmarket vehicles. Many financial experts urge parents to go for the stockmarket option. "The thing children have that parents don't is time," said David Kuo from financial advice site fool.co.uk. "For a young child, any money you give grows over 15 years. Therefore, they have time to ride out the peaks and troughs of the stock market."

But many parents could be forgiven for being nervous of stockmarket investment, even over the long term, and according to Moneyfacts the top six, best-buy, CTF savings accounts are all paying above 6 per cent a year. The current best buy from the Hanley Economic Building Society is paying 7.75 per cent on a minimum investment of £250. Any stockmarket fund is going to have to go some to beat such a return.

Despite such relatively lucrative rates, only a small minority of child trust funds enjoy further top-ups from parents and grandparents. This, said Mr Kuo, is due to a combination of tight finances and parental concern over what happens to the fund once it becomes available to a child: "The main problem with child trust funds that parents worry about is, how responsible will my child be at the age of 18? Instead, you could put money in a pension fund – which legally they are not allowed to touch until they are 50 (or 55 from 2010). This way you've done the first bit for 25 years, the rest is up to them," Crucially, Mr Kuo adds, contributions made into a pension are free of tax and ultimately part of the pot (up to 25 per cent) is available as a tax free lump.