Avoid child savings account rip offs

Child savings accounts should be a rare win-win-win situation in the world of personal finance. The child gets a handy lump sum on reaching maturity perhaps to go towards Uni or a gap year. Parents and grandparents get a warm glow every time they contribute towards their loved one's nest egg. And the bank or building society gets a chance to forge a financial relationship for life.

But like most relationships, a banker's relationship with a child is open to abuse. It would appear that some of the UK's beloved financial institutions are not above picking the pockets of children just as they the adults when their backs are turned. Consider this story of the kid who entrusted £100 with tax payer owned Lloyds and got 5p interest (0.05%) in a year:

Scrooge banks rip off young savers with paltry rates

Or the Sky Blues account from Coventry Building Society that entices kids in with a link to the local football team but then offers then a miserable 0.5% annual interest. True there are better deals around, such as the Halifax Regular Saver offering 6% annually (with conditions), but these - just like adult accounts - have to be watched like hawks as the interest rate is sure to drop to nothing once the offer period is up. Indeed the Halifax account reverts to the "easy access" rate after a year, currently 0.5%

The way banks and building societies lower the rates on these accounts is particularly cynical as they know that they are the most likely to be "forgotten about". They are mostly opened with the intention of being untouched for 15 years or more and are often added to by direct debit and are rarely inspected. A perfect fleecing opportunity.

Some better alternatives than trusting the banks:

1. Getting the best rate on a children's account and then teaching your kid to check the rate every few months and move the account when the rate changes. This will educate them in the weasley ways of financial institutions.
2. Invest in shares instead. Choose a couple of high yielding blue chips like Shell and Tescos and avoid high management charges of fund managers.
3. Buy NS&I index linked bonds which guarantee to beat inflation and which do not have tax deducted
4. Invest outside the UK. Take a long term bet on an area of the world which isn't weighed down by our "rich world" problems. It's risky but maybe a long term bet on Africa or Latin America might be better than sitting on deposit and collecting below inflation returns in the UK.

From the main website: What should you do with your savings in 2011?