Pocket money earns interest for cash-conscious children

In the second of a series on investing for kids, Svenja O'Donnell studies savings accounts

With the average student graduating up to £12,000 in debt, according to the National Union of Students, raising financially responsible children is one of the greatest challenges facing parents. And even if your offspring don't end up going to university, they are still likely to want to buy their own home and a car at some stage.

Teaching your child basic money management is a parental duty. Although personal finance is now being taught in schools, the basic message about saving for the future should be drummed in from an early age at home.

Relatives and friends may want to invest money for young children via long-term options such as unit trusts or children's bonds, providing a secure investment that will grow with the years. But teaching your child to manage their pocket money, or the cash they get for Christmas and birthdays, in a specially designated savings account is equally useful.

"It's important to get children into the habit of saving regularly," says Stuart Davis, senior savings manager at Lloyds TSB. "Then they will hopefully continue to save in later life."

Most high-street banks and building societies offer savings accounts for seven- to 11-year-olds. These can be opened with a minimum investment of £1 and are designed to teach children to manage their savings, allowing them to deposit and withdraw limited amounts of money using a passbook.

Building societies offer the most competitive rates of interest, paying between 4 and 4.7 per cent gross for a minimum investment of £1. Nationwide's Smart2Save, open to children up to the age of 11, remains one of the best accounts of its kind, paying 4.25 per cent gross. Its "welcome pack" includes a measuring chart for children to mark both their height and their savings.

"By saving in an account like Smart-2Save, children can gain interest they wouldn't get if they'd put their money in a moneybox," says a spokesman for Nationwide. "A child who has put £10 per month into the Smart2Save account over the past four years would now have saved £537 including interest."

Children who live near a branch of the Saffron Walden Herts & Essex Building Society can enjoy the best savings deal in the UK. The society's Ladybird account offers a gross rate of 4.7 per cent to under-16s. Good rates are also offered by high- street banks (ironically, since they are often renowned for their poor interest rates on adult savings accounts). Alliance & Leicester's First Save account for the under-16s pays 4.15 per cent gross and Halifax's Save4it 4 per cent. Lloyds TSB's young savers are paid 3.7 per cent.

Banks and building societies have worked to make their accounts attractive to young customers. Britannia, for example, is trying to woo junior football fans with accounts affiliated to teams including Manchester United and Chelsea and paying 4.15 per cent interest. Bank of Scotland's "supersaver" gift pack comes with a free piggy bank, football or lunchbox, while Nationwide's Smart2Save has its own newsletter featuring the account mascot, a golden-headed lion tamarind monkey from London Zoo.

But accounts shouldn't be judged only by the goodies that come with them; the trick is to pick one that pays good interest and then see if it offers any extras that will encourage your children to save.