You can get your grandchild - or grandchildren - off to a flying start in life by putting some money aside for their future.
But it can feel overwhelming trying to pick the best product to save or invest in. Grandparents can choose from ISAs and pensions to savings accounts and even products that could - if they’re very lucky - turn their grandkids into millionaires. Some come with an extra boost from the taxman.
We explain how four popular options work, who they might be right for, and how to open them.
1. Children's savings accounts
Children can normally earn a higher rate of interest on their savings than adults. The top rate on a children’s account is currently 3% from Santander’s 123 Mini Account, according to the financial website Moneyfacts. The 3% rate - which is paid monthly - is available on balances between £1,500 and £2,000. It is technically a current account; for children aged under 13, the account must be opened in trust and managed by an adult. This must be someone who has parental responsibility for the child and has a Santander personal current account.
So you will need to ask a parent or guardian of the child to open the account, but you will be able to pay money into it.
The next best interest rate is from HSBC’s MySavings account , which pays 2.75% on balances between £10 and £3,000.
This is available to children aged 7 to 17. Again, a parent or guardian must either open the account, or go to the branch with the child to sign the application.
The Santander and HSBC accounts both offer instant access, so there are no restrictions on withdrawing money.
Building societies can also offer decent rates on children’s accounts. For example, Saffron Building Society's Children's Regular Saver (issue 2) pays 3% on deposits up to £100 a month for a year. Buckinghamshireand Bath also currently pay around 2% on their accounts.
Make sure you check to see who needs to open the account, and if it’s the parent, speak to them about why you’d like to open it. Check to see if there are any rules around paying in a lump sum to the account or setting up a standing order if you want to make regular payments. The interest rate could reduce depending on the amount of money saved in the account.
Some accounts offer instant access, some require several months’ notice to withdraw the money, while others tie up the cash for several years.
An easy access savings account is a good option 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 rate changes
- The child is reaching their teens and looking for other facilities (the Santander account offers a Santander a contactless debit card or cash card when the child reaches the age of 13).
A fixed-rate savings account is a good option 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 and learn what it feels like to lock that amount away for a fixed period
- You want the child to see how their money can grow
- You are happy to research accounts when the fixed rate comes to an end and 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.
2. The investment option
There are two types of junior ISA:
- Cash: essentially a tax free savings account that pays interest
- Stocks and shares: a tax-free account where the money is invested in the stock market
The cash version may seem more familiar and safe, but when interest rates are so low and your grandchild has a long investment horizon before they can access the money, 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). Your grandchild will be able to access their money when they reach their 18th birthday.
The Private Office, financial planning firm, calculates that if you were to contribute the maximum of £9,000 each year for 18 years , at an annual 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!
And, according to research by investment firm interactive investor, if you put away the maximum £9,000 a year for 18 years and enjoyed annual investment returns of 17.5% you'd hit £1m by the tme your grandchild reached adulthood!
Being more realistic and contributing a smaller amount, say £50 a month for 18 years, the pot of money could grow to £15,300. This is based on figures by the insurance firm Aviva, which assume returns of 4.5% and an annual charge of 0.75%.
A junior stocks and shares ISA option is a good option if:
- Your contribution is part of a group effort to save by parents and family friends
- You want to introduce your grandchild 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.
- Your grandchild is fairly young, and therefore has a longer time-frame before they can access the money, making it easier for investments to ride out any stick market volatility (This means for those grandchildren within a few years of turning 18, a junior cash ISA could be a better bet.)
3. Premium Bonds
Premium Bonds are a fun way to save. Buying them for a grandchild 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. While there is no guarantee the bonds will win anything at all, the more you buy the more chance your grandchild has of winning. The current annual prize rate is 1%, which describes the average payout for someone with average luck.
You can apply for Premium Bonds online or by post, but you will need to nominate a parent or guardian to manage the money and provide their address and date of birth.
Anna Bowes from the saving website Savings Champion says: “We all know that NS&I has fallen out of favour with many of us [due to lowering its prize rate], 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 course the chance of winning £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 - for every £1 bond, the odds of winning a prize are 34,500 to one
- You want to demonstrate the difference between money in a savings account with a guaranteed interest rate, money in an investment account where annual returns differ each year and money in a monthly prize-winning account
- You want an accessible amount of money for your grandchild, perhaps alongside a junior ISA or savings account
- You are happy to accept that your grandchild may never win anything - but they will be able to cash in the money when they’re older if they want
4. A junior self-invested personal pension (junior SIPPS)
It is possible to open a pension for a child - and as a grandparent you may be all too aware of the importance of later life planning. Saving into a pension for a child will turbo-charge their retirement savings, plus they will also benefit from valuable tax relief.
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.
"Pension tax relief is one of the miracles of modern saving," explains Becky O'Connor, head of saving and investing at investment platform interactive investor. "It instantly adds a 'return' to your contribution that is not from interest or investment growth. Getting a guaranteed 25% on your contribution - you can't find another investment that offers such a boost for nothing. It is free money."
The biggest advantage of investing in a pension is the potential for decades of investment growth. From birth to retirement, it will have at least 55 years to grow before the money can be accessed. Over such a long time, even small amounts add up quickly and investments have time to bounce back if markets fall.
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.
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.
A junior SIPP is a good option if:
- You believe your grandchild will have alternative financial help as a young adult
- 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 low wages, the rising cost of living and a gig economy make it difficult for people to save for later life.
- You are in a position where you have already maximised other savings options and still want to do more
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Katie is staff writer at The Money Edit. She was the former staff writer at The Times and The Sunday Times. Her experience includes writing about personal finance, culture, travel and interviews celebrities. Her investigative work on financial abuse resulted in a number of mortgage prisoners being set free - and a nomination for the Best Personal Finance Story of the Year in the Headlinemoney awards 2021.
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