Five ways to save and invest for grandchildren - Times Money Mentor (2024)

You can get your grandkids off to a great start with a carefully chosen financial gift — and with an extra boost from the taxman too.

But what is the best way to save and invest for grandchildren?

In this article we set out:

• Five ways to save and invest for grandkids:
  1. Children’s savings accounts
  2. Junior ISAs
  3. Junior pensions
  4. Premium bonds
  5. Bare trusts
• Can you open an investment account for your grandchild?
• Tax benefits of investing for your grandkids

Related content: Are Premium Bonds a good investment?

Five ways to save and invest for grandkids

1. The everyday option: a children’s saving account

If you would like to give your grandchild a present that won’t break or become boring, how about a children’s savings account?

Some children’s accounts have a distinctly higher interest rate than ordinary accounts.

Opening a savings account for grandchildren at a local bank or building society is a good way to start teaching them the financial facts of life.

You can remind your grandchild that if they save money rather than spend it all in one go, they will have a lump sum to buy bigger items. Also point out when they receive interest their money is making money. We have more tips to teach kids about money here.

Saving for grandchildren as a grandparent is easy. You can open a savings account for them provided you bring appropriate proof of identity such as a birth certificate.

NOTE: 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.

What is the best savings account for a grandchild?

The best savings account to open for your grandchild depends on:

• What you are hoping the money will be used for
• How much money you want to add to it
• How much access you want to allow your grandkids to have

Regular savings accounts tend to pay the best rates. However, you’re usually required to pay in a minimum amount each month in order to get the interest rate.

Below we list the top-paying regular savings accounts.

Provider	Account name	Interest rate (AER)	Min/max deposit	Account access
	Children’s Regular Saver	5.80%	£5 / £1,200	Branch / Post
	Kids’ Monthly Saver	5.50%	£10 / £1,200	Branch / Online
	Young Saver	5.25%	£1 / £5,000	Branch / CashCard / Post / Telephone
	MySavings	5.00%	£1 / £3,000	Branch / Telephone
	Junior Saver (2)	4.50%	£3,000 / £25,000	Branch / Post / Telephone

Powered by data from Savings Champion

You could consider opening a fixed-rate savings bond, which also have high interest rates. However, the money is tied up for a set amount of time, typically between one and five years.

Find out about Mia’s grandmother, who sold her home and was able to pay £50,000 towards school fees

2. The investment option: junior ISAs

Open a junior ISA if you are planning ahead and would like to help your grandchildren when they’re a bit older.

Only parents or guardians with parental responsibility can open a junior ISA for a child under 16. But anyone can add to the accounts, up to the £9,000 annual limit (2023/24 allowance)

You can choose between a:

• Cash junior ISA: this is a tax free savings account that pays interest
• Stocks and shares junior ISA: the money is also free of tax but you can invest it in the stock market

Sticking with cash might seem a safe option, but when interest rates are lower than inflation, investing over as long as 18 years has more chance of growing your capital.

You might want to read about whether you should go for a junior stocks and shares ISA or cash ISA.

Here’s an example of how the pot could grow:

• Say you put just £500 in a stocks and shares junior ISA just after your grandchild was born
• You then pay £500 before every birthday for 18 years
• When your grandchild turns 18 the pot could be worth nearly £14,350. This assumes 5% investment growth each year less 1% charges.

Using a junior ISA means the money definitely goes to your grandchild, as only the child can take the money out once they turn 18.

WARNING: This does mean they could blow the entire lump sum on fast cars and wild parties – but you’ve got time to share money wisdom before then.

If they don’t spend it, the account gets transferred to the adult version of an ISA.

3. The long-term option: junior pensions

As a grandparent, you can appreciate the importance of retirement planning, and it really is never too early to start saving for your pension.

Yes, it’s even possible to open a self-invested personal pension for a newborn with a tax top-up too.

For every £1 you invest for grandchildren in a junior SIPP, the government will add another 25p.

You can add up to £2,880 every tax year to your grandchild’s pension pot, and it will be boosted by £720 in tax relief to £3,600.

A junior SIPP really is long-term planning. Pension money is locked away to grow tax free until your grandchild turns 55 at the earliest, rising to 57 from 2028, and possibly later in the future.

Read more here about the benefits of opening a pension for your child or grandchild.

The advantages of a junior SIPP

The real advantage of a junior SIPP is the potential for decades of investment growth (although, as with any stock market investment, there is always the chance you might get back less than you put in).

Over such a long time, even small amounts add up. You could opt for racy investments as your grandchild will have ages for them to bounce back if they do falter along the way.

For example:

• Say you could stretch to investing £240 a month from birth to your grandchild’s 18th birthday
• After 18 years those pension savings plus tax relief could grow to more than £580,000 when they turn 65
• That’s assuming growth of 5% a year less 1% charges

However, you can always stick to smaller sums – some junior SIPPs can be opened with as little as £25 a month.

Read out article about how to choose the right junior SIPP for your child here.

4. The lucky option: Premium Bonds

Feeling lucky? Premium Bonds are the fun side of saving.

Rather than just giving your grandchildren some cash, start saving and give them the chance to win tax-free prizes every month. You might create a mini millionaire!

• Every £1 Premium Bond bought from National Savings & Investments (NS&I) gets put into a prize draw every month
• Numbers are drawn at random to win prizes from £25 to two £1m jackpots each month
• The prize fund is roughly equivalent to a 4% annual interest rate
• You have a 24,000 to 1 chance of winning anything
• There is no guarantee your bonds will win anything at all – although the more you buy, the more chance your grandchild has of winning
• Unlike the lottery, your grandchildren won’t lose the original investment, and can always cash in their Premium Bonds

Grandparents can buy from £25 up to £50,000 worth of Premium Bonds per child under 16.

You can apply 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.

5. The tax-efficient option: bare trusts

Banish thoughts of teddy bears or nudity.

A bare trust is actually a simple legal arrangement, so you can give money away but still keep some control:

• you set money aside
• name the person who it’s for (the beneficiary)
• appoint someone to manage it (the trustee, which could be you or someone else)

By setting up a bare trust, you can make sure your grandchildren don’t get hold of money before they are old enough to manage it carefully.

Until they turn 18, the trustees manage the money on the child’s behalf. Bare trusts could be used for school fees, as the trustees can be instructed to dole out money for the child’s educational benefit.

This option is also tax efficient. Assets inside a bare trust are taxed as if they belong to the child, which normally means you don’t have to pay tax or little tax.

You can pay in up to £3,000 a year (or more if it comes out of your income and doesn’t affect your standard of living) and it won’t be liable for inheritance tax.

Bear in mind the £3,000 annual allowance includes all cash or assets you give to other people – not just the money in the trust. If you breach this, the money you put in the trust could be subject to inheritance tax.

How to invest for grandchildren

If you want to invest rather than use a savings account, here’s a summary of the different ways that you invest for your grandchildren:

• Paying into an investment account set up by a parent or legal guardian, such as a junior ISA or a pension
• Set up a junior investment account
• Invest into your own pension or ISA. This would leave you in control of the money, but you could give some of that money to your grandkids

Can I open an investment account for my grandchild?

While grandparents can pay into accounts such as a junior ISA or junior SIPP, you usually have to be a parent or legal guardian to open one.

The exception could be a junior investment account.

In this account, assets are held ‘in trust’ for a child until they turn 18.

Earlier withdrawals can be permitted if the money is used for the benefit of the child.

Tax benefits of investing for your grandkids

Yes, there are tax benefits to investing for your grandkids:

• You can pay in a maximum of £3,600 a year into a child’s pension and the government will top it up by 20%, up to £720 a year
• You can give up to £3,000 as part of your gift allowance each year free from inheritance tax (more if you live for seven years since the date of the gift)
• For ISAs and pensions, any profits from investments are free of dividend tax and capital gains tax