Your Money: Give me the child

Banks like to catch customers young, but are they the best place for your child's money? By Nic Cicutti

Oh, to be a child again. Unlike the rest of us, juggling with overdrafts, bills and final demands, kids get it all so easy. On birthdays or at Christmas there is always a postal order or a spot of cash surreptitiously slipped their way by a favourite gran or uncle. Banks and building societies know this. Which is why the courting of potential new customers begins even before their first teeth have appeared.

There is something energetically Jesuitical in this strategy. It is based on the argument that if you catch your punters at a young age, they will stay with you for the rest of their lives.

As banks and building societies transform themselves into global financial institutions, a successful kiddie's account can help win that person's custom when he or she leaves home, gets a job, buys a house, needs a pension or insurance and, eventually, wants to provide for his or her own children. All in all, a potentially lucrative long-term relationship.

That is why many banks and societies fall over themselves to offer surprisingly tasty interest rates on what are likely to be relatively small amounts in an account. That, and the fact that children's accounts are less likely to be used as a revolving door, requiring excessive - and expensive - "servicing" by bank staff.

Almost all parents will, in the course of a child's first few years, receive small or large cash gifts intended for them. For many parents, the money itself can act as as part of a process whereby children learn the benefits of saving up.

John Simpson, a systems engineer living in north London, makes a point of taking his nine-year-old daughter Sarah with him to the Halifax on Saturdays, when he wants to pay in money on her behalf or even take some out of his own account. He says: "I think it is important for her to know where the money that pays for clothes or food, or any other shopping, comes from. I want Sarah to understand that that these things don't just materialise out of thin air, that you have to work for them or put money aside to buy them. My wife, Linda, thinks I am strange, but when Sarah hands over her money she feels really proud and grown-up."

If you are intent on turning those gifts into a sizeable sum to be used by your child when he or she is close to adulthood, a bank or a building society may not be the best place for the entire nest egg.

It may be more appropriate to put the money on their behalf into a suitable investment - in your name - after taking appropriate advice from an independent financial adviser. This is because equity-based savings schemes have, over the longer term, consistently outperformed even the best bank or building society high-interest account.

Alternatively, you should ask your adviser to help you choose a suitable friendly-society regular investment scheme, which has the additional advantage of being tax free.

But for smaller amounts of money, irregular deposits, shorter investment periods or ease of access, banks and building societies are best.

For the first few years, when you are effectively looking after your child's money, it makes sense to choose primarily on the basis of the interest paid on the deposit.

Although the natural temptation is to opt for a large building society or a bank because of their name or ease of access, many smaller and local societies will offer a better rate of interest.

For example, Halifax's popular Little Xtra or Quest account pays 3.1 per cent gross, once the investor is registered as a non-payer with the society. The interest is paid half-yearly. But Coventry Building Society pays 4.75 per cent to members of its Interest Zone Account. Scarborough Building Society offers 5.5 per cent to children in its Young Super Saver Account.

However, Vicky Burn, deputy editor of Moneyfacts, the research organisation, warns: "The rates on offer vary greatly with many societies still limiting their accounts to local residents only." Among those imposing such limits are the Chorley & District, Darlington, Harpenden, Stafford Railway, Tipton and Universal societies.

As children grow older, some may be attracted by additional incentives from societies. Bank of Scotland provides a special backpack, a folder and magazines. Barclays also has magazines, plus a pounds 5 WH Smith voucher to new account-holders.

Halifax offers a range of goodies including moneyboxes, stickers and badges, passbook wallets and magazines. Nationwide competes with a CD and a "welcome pack" of goodies. Yorkshire is one of the few to try to appeal to children's altruism: for each new account opened, pounds 1 is donated to the NSPCC, plus 10 per cent of all gross interest earned.

Societies often hope to attract young customers by trying to appear hip and up-to-the-minute. Hence the names of some of their accounts, including the Coventry's Interest Zone. There are no such ambitions with Chorley's Young Chorleian or Melton Mowbray's Sunny Bond, though they may have increasing appeal if the Thirties ever make a fashion come-back.

Stafford Railway Building Society proves that at least one of its executives has a sense of humour. Its children's account is called the Junior Expressn

CHILDREN'S ACCOUNT SELECTION

Lender Account deposit rate (%) int. paid

Bank of Scotland Super Saver pounds 1 3.50 Yly

Barclays BarclayPlus pounds 1 3.50 Qly

B'ham Midshires SmartStart pounds 25 5.00 Yly

Halifax Little Xtra/Quest pounds 1 3.10 1/2Yly

Nationwide Smart pounds 1 3.20 1/2Yly

Yorkshire Happy Kids pounds 10 3.05 1/2Yly

Chorley & District Young Chorleian pounds 5 5.95 Yly

Coventry Interest Zone pounds 1 4.75 Yly

Darlington Foundation pounds 1 5.75 Yly

Harpenden 18 Club pounds 5 6.00(*) 1/2Yly

Leeds & Holbeck YoungSaver pounds 1,000 6.00 Yly

Manchester Young Savers pounds 5 4.90 Yly

Melton Mowbray Sunny Bond pounds 250 6.50 Yly

Scarbrough Young Super Saver pounds 500 4.55 Yly

Stafford Railway Junior Express pounds 1 5.50 Yly

Tipton & Coseley Cash Zone pounds 10 5.75 Yly

Universal Children's pounds 1 5.45 Yly

(*) No withdrawals until 18th birthday Source: MoneyFacts