Which piggy bank?
Today's children are a thrifty bunch. Twelve-year-olds save on average almost half their pocket money, while 14 to 16-year-olds save on average Pounds 3.30 a week, according to a recent survey by the Trustee Savings Bank. But when it comes to investing their little nest eggs, these frugal youngsters are faced with a bewildering range of choices.
Banks, building societies and friendly societies nearly all offer special, but widely-varying rates to encourage young investors and their relatives. This is pure self-interest. It's generally acknowledged that savers tend to stay with the institution they started with. For savers faced with differing returns and incentives, it's well worth shopping around.
Generally, banks give the worst value, although some try to tempt children with free gifts. The Lloyds Young Savers Account, for instance, offers youngsters under 11 a Young Savers' Guide to Money, an Account Record Book and a stationery pack. The rates of interest are tiered, ranging from 1 per cent gross on accounts below Pounds 50 to 3.3 per cent on accounts above Pounds 500.
Building society accounts generally offer more favourable interest rates. Anyone joining the Woolwich for Kids Club for children under 16 gets 3. 9 per cent interest on accounts above Pounds 1, as well as a birthday card each year, a Henry's Cat magazine twice yearly (for those under 13) and a free money box and passbook wallet.
Altruistic children should open a "Happy Kids" account with the Yorkshire Building Society, which donates Pounds 1 to the National Society for Prevention of Cruelty to Children for every new account. Ten per cent of the total gross interest paid to each child will also be donated. The gross interest on accounts over Pounds 10 is 3.85 per cent. Above Pounds 5,000, the interest rises to 4.1 per cent. The Universal Building Society in Newcastle will give Pounds 1 for every new account to Yellow Brick Road, a children's charity.
Other regional building societies are also offering up to 2 per cent more than the larger, national societies. The disdavantage is that you will have to operate the account by post. The Norwich and Peterborough's Headstart account pays 5.4 per cent on a minimum investment of Pounds 250. Skipton's Young Sovereign account pays 5.75 per cent gross on sums between Pounds 25 and Pounds 3,000 and the Stafford Railway's Junior Express offers 6 per cent gross on investments up to Pounds 5,000.
Top of the pile is the Young Chorleian at the Chorley District Building Society, which pays a princely 6.85 per cent gross on all accounts over Pounds 5. Unfortunately, you have to live in Lancashire or Greater Manchester to qualify.
If you can persuade your child to defer the delights of a new bike in favour of more favourable investment returns, National Savings Children's Bonus Bonds will make it worth your while. The main advantages are that the bonds not only pay 7.85 per cent compound interest, plus a five-yearly bonus, but are also tax free. However, the investment must be held for five years, and Pounds 1, 000 is the maximum sum which can be invested in any one issue.
If you are prepared to take more of a risk for a (potentially) better return, you could invest money for your child in a unit or investment trust, which will normally be held until the child is 18. You can either make monthly payments or invest a lump sum.
In the long term, unit trusts can out-perform building society investments, but there is no guaranteed rate of return. A useful guide, "Saving for Children", is available from the Association of Unit Trusts and Investment Funds (0181-207 1361). It explains how to choose and use unit trusts for children.
If you can lock up some money for 10 years, friendly society policies offer tax-free lump sum policies for children. The maximum you can invest without incurring tax is Pounds 25 per month or Pounds 270 per year. Contributions are usually invested in units linked to the stock market, which are riskier than deposit accounts. Charges can also be high; the Family Assurance Friendly Society, for instance, makes a 40 per cent deduction on the first year's premium, with an annual management charge of 1.95 per cent thereafter. One of the best long-term performers among the friendly societies offering children's bonds is reckoned to be the Tunbridge Wells Equitable.
If you follow the right tax procedures, your children will be able to make the most of their savings * All children have their own personal tax allowances, worth Pounds 3,525 for the financial year 1995-96. To gain them exemption from tax deducted at source on many bank and building society accounts, parents must fill in the Inland Revenue's Form 85.
* Beware! If a parental gift earns interest of more than Pounds 100 a year, the parent pays tax on the whole of that income. Both parents can give investments, so your child can earn interest of up to Pounds 200 from your gifts. But if the money comes from any other source, this rule doesn't apply.