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personal Finance: Why saving is no longer a matter of child's play.

Byline: Peter Axon

Many parents are keen to encourage their children to acquire the savings habit. A recent survey revealed that children now receive an average of pounds 2.31 pocket money every week. The investigation also showed that they save more than a quarter of all their cash.

During the past few years, banks and building societies have launched special deals for 'kid's cash,' so they now possess a wealth of accounts to choose from. This drive to start them off early has led to saving schemes that are more tempting than those on offer to their parents.

The Investment Marketing Director of independent financial advisor, Willis Owen in Nottingham says: 'We are frequently asked 'what's the best place to invest money for my child or grandchild?' The answer of course depends on the purpose for which the proceeds are to be used, how old the child is, and whether you want to make 'one-off' or regular contributions.'

Another reason for the mushrooming range of children's financial products is that parents are recognising the value of encouraging thrift in their offspring.

Generous interest rates in context of the current economic climate reflect a growing acknowledgement that children are becoming increasingly sophisticated when it comes to saving and money management. They can no longer be regarded as a soft touch, easily fobbed off with a cheap moneybox or a set of pens.

Furthermore, research confirms that younger children are taking control of their money and understanding concepts such as tiered-interest rates.

Rather alarmingly more than half of the eight and nine-year-olds quizzed by NatWest believe money is 'the most important thing in the world.'

Also, 84 per cent of children have a bank and building society account, and more than half said that if they were given pounds 50 they would save it for when they were older.

Meanwhile, financial institutions are queuing up to woo today's junior savers.

A major tactic is still to offer free incentives. Accounts geared towards younger children typically came with badges, T-shirts and cuddly toys; while those for older kids offer cinema coupons, CD discount vouchers or even driving lessons. Alliance and Leicester has devised one of the most mouthwatering freebie packages.

But the fact that more young people are becoming more penny wise has led to a few banks and building societies providing the option of cash - cards that let children possess money with hole-in-the-wall withdrawals, via their own PIN number. In addition, debt cards are available which allow boys and girls to pay for items in a shop. Twenty-four hour telephone banking, and access to cash abroad further emphasises the importance which is now being attached to junior accounts.

Yet the message to get across to children is that they should check out the interest rate on offer plus other facilities like easy of access to their money.

Of the dozens of children's accounts on the market, the vast majority are directed to encourage youngsters to leave their cash untouched for longer periods. Some pay tiered interest rates, providing the child a better return the more they save.

Interest rates vary enormously so it is worth shopping around.

Melanie Stewart, investment expert at Moneyfacts, the financial information magazine, says: 'Children's savings rates are holding up well in the present low-rate environment.'

Top of the class amongst the instant access accounts happen to be the two biggest building societies, Nationwide Smart account and Britannia First Saver. Both pay an enticing 4.70 per cent gross.

Close on their heels come Alliance and Leicester First Save with 4.45 per cent and Coventry BS Interest Zone providing 4.40 per cent.

All can be opened with a balance of just pounds 1, and, apply to youngsters up to the age of 18 - except Alliance and Leicester which terminates at 16.

Some banks and building societies now divide the structure of their children's accounts.

For instance, Nationwide operates a two-tier system. It runs an Under-12 Smart account, whilst also providing a 12 to 18 young persons' version under the same account banner.

Marketing reflects the different age-ranges. The upper-tier issues a cash dispenser-machine withdrawal card.

However, prevailing returns from National Savings are most competitive. Issue Number 3, of its Children's Bonus Bonds (minimum pounds 25 maximum pounds 1,000) run for five years and will yield 4.65 per cent gross interest per annum. But for smaller amounts, made on an ad hoc basis, there is little to improve upon your local bank or building society.

For the younger child, with 10-years or more before needing the capital, you can open a tax-free Baby Bond. This allows contributions of pounds 300 a year (pounds 25 per month). The best terms can be secured from well-established leaders in this particular field, such as Tunbridge Wells Friendly Society and Teachers Building Society. Since April 2001, 16-year-olds have been eligible to set up a mini-cash ISA provide the opportunity to earn a higher rate of return.

Nevertheless, it is surprising to find that a few banks and building societies give more interest on junior accounts than on their range of ISA deals. Many parents are still failing to reap maximum interest from their savings because they remain in the dark concerning their son's or daughter's tax limits.

Children possess their own tax allowance so that any income up to pounds 4,615 (personal allowance for 2002/3) is tax-exempt as are any capital gains up to pounds 7,700 (CGT allowance 2002/3). For instance, the latter can apply if a child has been left an inheritance in the legacy of a relative.

Yet it is important to realise that when interest earned on any capital gifted by a parent exceeds pounds 100 per annum it is all taxed as if belonging to the parent. Such a restriction does not apply to gifts from grandparents, other relatives or friends.

Because their children are non-taxpayers, parents should ensure that Inland Revenue form R85 is filled in to obtain full entitlement to gross interest payments. This prevents tax being deducted at source. However, most counter staff are keen to point out this tax advantage and the simple procedure involved.

As schoolchildren believe that money makes the world go round, they are now eager to win the percentage game. Indeed, this is a far cry from being simply child's play.
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Title Annotation:Business
Publication:The Birmingham Post (England)
Date:May 11, 2002
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