Ooh, I knew this one was going to come up again.
We all know Peter Pan, right? The immortal kid who invites other kids to Neverland, where they'll never have to grow up?
What's so terrifying about that?
Well, let's start with the terrors most people know. Like in Annie, Peter Pan's lead preteen characters get themselves in very real danger, in spite of the all-fun-and-games facade Neverland puts up.
Captain Hook fully intends to kill Peter given the slightest chance, and he's perfectly happy to kill as many of the other Neverland kids as happen to cross his path.
Except Wendy. If he succeeds in annihilating the Lost Boys, he's going to take Wendy alive, to keep as the pirate ship's "mother." At least, that's the extent of the kids' understanding of his intentions.
But Hook is the villain. Villains are expected to be scary and often to bring out the worst in heroes. He may be a bit on the extreme side as kids’ books go, but not too far out of the ordinary. Not enough to put this story in the #2 spot.
What makes Peter Pan exceptionally terrifying is Peter himself.
I've written before about why Peter is one of my favorite tragic figures. I almost hesitate to call him a tragic hero, but if Macbeth merits the title, I suppose Peter must too. He's an antihero through and through, the deeply flawed cause of his own unhappy ending, which is something you don't often see in children's literature outside of bland, two dimensional morality tales.
Peter has in all likelihood killed more people than Hook. And I'm not talking about killing pirates to protect the lost boys. The thing all the movie adaptations fail to mention is that Neverland doesn't actually keep its inhabitants from aging. Peter is the only one frozen in time, the only one who can't tell imagination from reality, and the only one whose thoughts the island responds to.
Peter is forever trying to preserve his world of fantastical childhood, and anyone who challenges him or simply gets too old for his taste in friends, he kills. We're told this as a fact from the start. Some of the lost boys love Peter as the closest thing to a parent they can remember having, but everyone in Neverland lives in fear of his wild mood swings and whims.
But the other parts of the cycle continue as well, with Peter never growing up, searching forever for other children to keep him company.