Stashing away some cash for your grandchildren can help provide them with financial security for their future. But with a variety of different savings accounts to choose from, how do you know what’s best?
We take a closer look at the best savings accounts for grandchildren, along with their pros and cons, to help you make the right choice.
Types of savings and investment accounts available
There are several different options when it comes to putting money away for your grandkids. To help you choose, you’ll need to consider at what age you want your grandchildren to be able to access the money, what you are hoping the money will be used for and whether you want to save in cash or invest in the stock market.
Stock market investments have the potential to offer higher returns than cash savings, particularly if you plan to leave the money invested for a number of years. However, investing is also a riskier strategy and you could end up getting back less than you originally invested, so it’s important to consider this carefully.
We’ve outlined some of your savings options below:
Children’s savings accounts
One of the easiest options is a straightforward children’s savings account. Most high-street banks offer these accounts and many can be opened with as little as £1.
Children’s savings accounts can often be opened by grandparents, but in some cases you will need to get permission from the child’s parents or legal guardians first. You will also need to provide the correct documentation such as the child’s birth certificate.
With a child’s regular savings account, you can pay in a set amount each month for a year and interest rates are usually fairly generous. However, after a year, the account will close.
Alternatively, you can pick an easy access savings account which lets you pay in a sum of money whenever you choose to. You’ll also be able to access the money if needed. However, interest rates on easy access accounts tend to be lower.
Pros
- Easy way to save for children
- You won’t need to pay in a huge amount each time
- Many high-street banks offer child savings accounts
Cons
- Easy access interest rates aren’t always competitive
- Regular savings accounts only last a year
Fixed rate bonds
As well as easy access and regular savings accounts, some banks offer fixed rate bonds for children. With this type of account, the money has to be left untouched for between 1 and 5 years. In return you’ll usually receive a higher rate of interest. However, this type of account will only be suitable if you have a lump sum to invest as you can’t usually top it up during the term.
Pros
- Typically pays a higher rate of interest
- Good if you want to lock a sum of money away for a set time
Cons
- You’ll need a lump sum to invest as further top-ups cannot usually be made
- You won’t be able the access the cash for the term of the bond
Junior ISAs
If you’d prefer to ensure your grandchild’s money is locked away until they are 18 years old, a junior ISA might be a good option. You can choose from either a cash junior ISA or a stocks and shares junior ISA. Just remember, if you opt for stocks and shares junior ISA, your capital could be at risk.
Be aware that only parents and guardians can open a junior ISA for a child under 16, but anyone can contribute to them, as long as they do not exceed the annual junior ISA limit of £9,000 (for the 2023/2024 tax year).
Junior ISAs are tax-efficient which means no tax needs to be paid on earnings. Once your grandchild turns 18, they will gain full control of the account and can choose to invest it into an adult ISA or other savings account, or they can choose to withdraw the money.
Pros
- Tax-efficient savings account
- Option to choose from a cash account or stocks and shares
- Your grandchild can only access their money once they reach 18 (this can be both a pro and a con)
Cons
- Can only be opened by the child’s parents or legal guardians
- Can only pay in up to the annual allowance
- Your grandchild can choose to do what they want with the money once they reach 18
Premium bonds
Premium bonds can be a bit of fun and are a popular investment option offered by National Savings & Investments (NS&I). Anyone can buy premium bonds for a child under 16, although you will need to check with the child’s parents or guardians first.
Grandparents can buy from £25 up to £50,000 worth of premium bonds per child and every £1 gets put into a monthly prize draw. If you’re lucky you could win anywhere from £25 up to £1 million and winnings are completely tax-free. When your grandchild turns 16, you can sign the premium bonds over to them.
Pros
- Fun way to save
- You could win up to £1 million tax-free
- Anyone can buy them
Cons
- You might not win anything
- You don’t earn any savings interest
Bare trusts
Trusts are legal arrangements where money or assets are held by a person for the benefit of someone else. A bare trust is the simplest type of trust and enables you to set money aside for your grandchild’s future, while appointing yourself or someone else as a trustee to retain some control over what the money is used for.
The trustee manages the money on the child’s behalf until they turn 18. However, the trustee might be able to distribute the money earlier if it is needed for school fees, for example.
Pros
- You have some control over what the money can be used for
- The account can remain open beyond the child’s 18th birthday
Cons
- Money in the trust could be subject to inheritance tax if you exceed the annual allowance
- The beneficiary (the child) is automatically entitled to the money at the age of 18 and they can use it as they wish
How much can I save tax-free for my grandchildren?
Each grandparent can gift up to £3,000 to their grandchildren in any one tax year, exempt from inheritance tax. It can be given to one child or split between several. If the full £3,000 is not used one year, it can be carried over into the next year. However, if you don’t use it then, you’ll lose it.
If you want to give more than this £3,000 allowance, note that inheritance tax will only be due if you die within 7 years of having given that gift.
You can also gift £250 to as many people as you want every tax year without paying any inheritance tax. However, you can’t give both the £250 and the £3,000 to the same person.
If your grandchild is getting married, you can also give up to £2,500 without it being taxed.
How can I make sure my loved one is responsible with the money I give?
The only way you can really do this is to sit down and talk to your grandchild. Explain to them the importance of managing their money carefully and how saving can help ensure they have financial security in the future. It can also be worth tracking how their savings grow through online banking or your bank’s app so your grandchild gains a greater understanding of how saving can pay off.
Choosing a junior ISA or bare trust will ensure your grandchild cannot access their funds until they are 18, but even then, there’s nothing stopping them from blowing the cash on a new car or trip round the world. So be sure to discuss these financial matters with them first.
Bottom line
Choosing the right savings account for your grandchild will ultimately come down to personal preference. If you’d prefer a straightforward savings account with a high-street bank, you might want to choose an easy access savings account. But if you’re looking for something that can’t be accessed for a while you might prefer a bare trust or junior ISA. Weigh up the pros and cons of each option carefully to help you come to the right conclusion.
Frequently asked questions
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Children get the same personal allowance as adults. This means they can earn £12,750 for the 2022/23 tax year without paying tax. Children are also eligible for the £5,000 starting rate for savings and the £1,000 personal savings allowance, giving them a total of £18,570 before they need to start paying tax.
However, you should be aware that if money gifted by parents earns more than £100 in interest per year, before tax, the full amount of interest will be taxed as if it were the adult's, not the child's. The good news is that this £100 limit does not apply for money gifted by grandparents.
Remember, too, that you can save up to £9,000 tax-free with a junior ISA each tax year. If you buy premium bonds for your grandchild, any prizes won will also be tax-free.
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Yes, if your bank is regulated by the Financial Conduct Authority (FCA), your money will be protected under the Financial Services Compensation Scheme (FSCS). Note that as premium bonds are offered by NS&I and backed by the Treasury, all your money is safe.
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