The best CTF deposit accounts are from Nationwide and Britannia building societies, both of which pay 6%.

However, advisers recommend investing in equities rather than cash. Anna Bowes of Chase de Vere, an adviser, said: “Shares are more risky, but they should provide better returns over the long term.”

Cash in stakeholder plans is initially invested at least partly in equities and gradually switched to less volatile assets after 13 years to reduce the risk of a heavy loss close to maturity. Charges are capped at 1.5% a year and you can pay in from £10 a time.

Most stakeholder CTFs are trackers that follow a stock- market index, however. Such funds typically levy charges of between 0.3% and 0.5% a year, but many CTF trackers, including the Nationwide All-Share fund, charge the full 1.5%.

Bowes’s stakeholder recommendations include those from F&C, which tracks the FTSE All-Share and charges 1% a year; Family Investments, which is run by New Star and has global exposure; and the HSBC UK Growth & Income fund, which is being offered under stakeholder terms.

Non-stakeholder CTFs can charge more than 1.5%, although in practice most do not. They do, however, tend to have higher minimum contributions than stakeholder plans.

For non-stakeholder funds, Bowes likes The Children’s Mutual, which offers a choice of 16 funds including Invesco Perpetual Income and Gartmore Cautious Managed, as well as an ethical option.

If you choose the non- stakeholder route, you can also opt for a self-select CTF that has access to individual shares and other investments as well as funds. These are available from The Share Centre and Reyker Securities.

The advantages of CTFs include the government’s pledge to make further contributions when the child reaches seven and again when they are in secondary school, and the fact that all profits, dividends and interest are free of capital-gains tax (CGT) and income tax.

But parents saving for children who do not qualify for CTFs, or those wanting to supplement CTF savings, can also choose from a wide range of savings accounts (see Find the best child's account for details).

However they, too, may be better off investing in equities. Figures from F&C, a fund manager, reveal that £250 invested in an average savings account 18 years ago would now be worth £650. The same amount invested in shares would have turned into more than £1,400.

There are no restrictions on the type of fund you can invest in. Parents wanting to invest the same for an older child as for one who qualifies for a CTF could, for example, invest in HSBC Growth & Income for both, although initial charges would be higher outside a CTF.

Children also qualify for the standard CGT exemption of £8,500 and are entitled to a personal tax allowance of £4,895.

But the amount they can earn tax-free on a standard equity fund or savings account drops to £100 a year if the money is paid in by a parent. So make sure the donor is another relative or a friend.