4 brilliant ways to start saving for grandchildren

Saving for grandchildren can be a bit of a minefield, but that's where we come in. Read on for all you need to know

saving for grandchildren
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If you’re looking for ways to start saving for grandchildren there are several options to consider. You may want to take advantage of a tax break at the same time or ensure you beat the paltry low interest accounts on offer. 

1. The savings account 

Children can currently earn a decent 3.5% on their savings. Halifax and Barclays pay 3.5% fixed for a year and lets you save up to £100 a month. However, Halifax won’t let you make withdrawals within the year unless you close the account while Barclays will charge you an interest penalty. You can open a savings account for them provided you bring proof of identity such as a birth certificate.

This fixed-rate savings option is a good one if:

  •  There is no need for any withdrawals 
  •  You want to encourage the child to pay in some of their pocket money or birthday cash 
  •  You want the child to see how their money can grow 
  •  You are happy to research accounts when the fixed-rate year is over to ultimately open another account to take advantage of the best rate on the market 
Important tax benefit

Interest on the child’s account won’t be taxed if the money comes from a grandparent - unlike money given by a parent, when any interest over £100 a year is taxed as if it was earned by the parent. 

There are also easy access accounts that allow you to save and let the child access their money easily and quickly if they want to. Santander 1|2|3 Mini Current Account pays one of the best rates on the market for children with £1,000 to £1,500 lump sums. 

It is a tiered account which means that if the balance is less than £1,000 or more than £1,500 a lower rate of interest will apply. The account pays 1% on balances up to £1,000, 2% on balances between £1,000 and £1,500 and 3% on balances between £1,500 and £2,000. No interest is paid on balances above £2,000.

This easy access savings option is a good one if:

  •  You want to have the option of immediate access to the money 
  •  You want to be able to easily move the money if the rates change 
  •  The child is older and built up a lump sum from birthday and christmas gifts 
  •  The child is reaching their teens and looking for other facilities (the Santander account offers a Santander contactless debit card or cash card when the child reaches the age of 13).

2. The investment option

There are two types of junior ISA:  

  •  Cash: essentially a tax free savings account that pays interest 
  •  Stocks and shares: the money here is invested in the stock market 

The cash version may seem more familiar and safe, but when interest rates are so low and you have 18 years as an investment horizon, a stocks and shares ISA has more chance of beating inflation.

Only parents or guardians with parental responsibility can open a junior ISA for a child under 16 but anyone can contribute Up to £9,000 a year (the 2021-22 allowance) 

The Private Office, a financial advisory, has calculated that if you were to contribute the maximum of £9,000 each year for 18 years , at a growth rate of 5%, the estimated future value of the investment would be £255,953. That represents an increase of £93,953 on your initial investment! 

If you can contribute just £50 a month for 18 years you could grow the pot of money to £15,300. [Based on returns of 4.5% and an annual charge of 0.75%, figures courtesy of Aviva].

A junior stocks and shares ISA option is a good one if: 

  •  Your contribution is part of a group effort to save by parents and family friends 
  •  You want to introduce your child to the concept of investing rather than saving 
  •  You want to increase your chances of beating inflation 
  •  You want to benefit from tax-free growth.

(MORE: Bank accounts for kids)

3.  Premium Bonds 

Premium Bonds are the fun side of saving. Saving money for them this way gives them a chance to win tax-free prizes every month. Grandparents can buy from £25 up to £50,000 worth of Premium Bonds per child under 16.

Every £1 Premium Bond bought from National Savings & Investments (NS&I) gets put into a prize draw each month. Numbers are drawn at random to win prizes from £25 to two £1m jackpots each month. While there is no guarantee your bonds will win anything at all, the more you buy the more chance your grandchild has of winning. You can apply for Premium Bonds online or by post, but will need to nominate a parent or guardian to manage the money and provide their address and date of birth.

Anna Bowes from Savings Champion says: “We all know that NS&I has fallen out of favour with many of us, however, Premium Bonds are still a firm favourite with new and existing savers. Unlike a normal savings account, Premium Bonds do not pay any interest – instead each month there is a prize draw and each bond holder has a change of winning a prize of between £25 and £1m. Of course the chance of winning the £1m is extremely unlikely – but two people a month have to!”

Premium Bonds are a good option if:

  •  You want to bring a bit of fun to saving 
  •  You don’t want to lose any of your original contribution (unlike the lottery you can always cash in Premium Bonds) 
  •  You want an accessible amount of money alongside a junior ISA or fixed-rate savings account 
  •  You are happy to accept the prize fund is roughly equivalent to a non-inflation-busting 1% annual interest rate.

4. A junior self-invested personal pension (junior SIPPS) 

It is possible to open a pension for a newborn - and as a grandparent you will be all too aware of the importance of later life planning.

For every £1 you invest for your grandchild this way, the government will add another 25p. You can add up to £2,880 every tax year to a junior SIPP and it will be boosted by £720 in tax relief to be ultimately topped up to £3,600.

The biggest advantage of investing this way is the potential for decades of investment growth. It will have 55 years to grow and over such a long time even small amounts add up and risky investments have time to bounce back if they cause the SIPP to falter on occasion over the decades.

The only downside in the eyes of the grandchild will be that this money will not be accessible until they turn 55 at the earliest, rising to 57 from 2028, and possibly later beyond then.

For example, if you could commit to £120 a month from birth to your child’s 18th birthday, that money plus the tax relief could grow to more than £290,000 when they turn 65 - assuming growth of 5% a year and 1% charges.

A junior SIPP is a good option if:

  •  You feel your grandchild will have financial help at earlier stages in life anyway  
  •  You prefer your grandchild not to have access to your money when they are younger 
  •  You want to take advantage of tax relief 
  •  You worry that stunted wages, the cost of living and a gig economy make it difficult for people to save for later life.