The best ways to save for the next generation

If you want to teach your children to handle their money from an early age, a children’s savings account is a great way to do it. Early saving encourages positive lifelong habits, and also teaches children the wonders of compound interest, as interest builds over time.

Children's savings accounts also pay slightly higher rates than grown-up accounts, as banks compete to win customers of the future. Once you have set up an account you should encourage family members to top it up at birthdays and Christmases, and encourage the children to pay some of their pocket money in.

Children may have to pay income tax on larger balances, but only if the interest on money given by their parents tops £100 a year.

Anything above that is taxed at their parent's marginal rate, to stop families using their children as a tax avoidance scheme. This doesn't apply to funds given by grandparents or friends.

Government-backed National Savings & Investments offers a children’s bond paying a fixed interest rate over five years, free of tax.

Or consider the ever-popular Premium Bonds, which adults can take out on behalf of children under 16, in the hope of winning tax-free cash prizes ranging from £1 and £1 million. The danger is that they win nothing at all.

Family and friends can save without worrying about the taxman through the junior ISA allowance, which is currently £4,080 this year (rising to £4,128 in 2017/18).

Again, rates on junior cash ISAs are slightly higher than on standard savings accounts, and all the interest is free of tax. Do not just go to your own bank or building society, shop around to get the best deal.

If you are saving for children for a period longer than five years, consider putting money into the stock market. Although more volatile than cash, shares should provide a better return over the longer run.

You can invest free of tax through a junior stocks and shares ISA, available through financial advisers, stockbrokers and fund platforms such as Alliance Trust, Bestinvest, Cavendish Online, Chelsea Financial Services, FundExpert and Hargreaves Lansdown. These typically allow you to invest in a wide range of investment funds from big-name managers.

Remember, all the money you pay into a junior ISA belongs to the child and they have full control from age 18. They could accumulate a fair-sized sum, so you need to teach them that looking after money isn’t child's play.

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