The gift of financial security will surely outweigh any plastic toy you can buy your grandchildren now. Toys will be cast to one side and forgotten, but saving for grandchildren can provide a safety net for their financial future when they are navigating the tricky world of being a grown-up. Few adults will be able to recall what their grandparents gave them for their 3rd birthday, except perhaps the ones who received savings as a gift.
It is also worth considering the relative financial inequality between post-war ‘baby boomers’ and the youth of today. Rising house prices, student debt, and a country attempting to recover financially following the pandemic will all contribute to the financial hardships children of today will inevitably face when they come of age.
However, with so many ways to save available, the question remains as to how to grow savings for your grandchildren efficiently. Below we have outlined some of the options available for saving for grandchildren and we’ve calculated what you would have amassed in the account over a period of 18 years with one single contribution of £1,000.
It’s also worth noting, that if you plan on saving for grandchildren who live abroad there are various options available to make the best of your savings intentions for your loved ones.
Open a Savings Account
As a grandparent it is possible for you to open savings accounts for your grandchild, providing you have the correct documentation to hand, such as a passport or birth certificate. As long as this generates an income that is less than the personal allowance of £12,500, then you won’t have to be concerned with income tax and can simply select the account with the highest interest rate paid. Bear in mind, that since this is a long term endeavour, interest rates will change and it would be prudent to keep checking that the interest rate your grandchild is getting, remains the best one on the market in years to come. You are at liberty to deposit a lump sum into your grandchild’s saving account or deposit regular monthly amounts.
What is the best savings account for my grandchildren?
One of the best interests rates available at the time of writing this article is at NatWest who are offering 3.04% on their ‘bank linked’ savings accounts.
- Amount deposited – £1,000
- Interest rate – 3.04%
- Duration – 18 Years
- End value of savings – £1,727.21
Open a Junior ISA
Whilst Junior ISAs are excellent ways to save for your grandchild, as a grandparent, you are not at liberty to open one on behalf of your grandchild. This would need to be facilitated by the child’s parents or guardian. However, once this account has been set up, as a grandparent you are at liberty to contribute up to the annual limit of £9,000 for 2020/21 into their ISA where any gains will be tax-free.
Read more about opening Junior ISAs in our complete guide.
Cash Junior ISAs
Cash Junior ISAs will allow you to save for your grandchild free of any risk as essentially this is simply a savings account within a tax-free wrapper. This means you are guaranteed to get back anything you deposit, plus any interest you earn on the account. You won’t find the same interest rates that can be found outside of the ISA tax wrapper, however, the best rate at the time of writing this article is provided by Coventry Building Society who are offering 2.95% AER.
- Amount deposited – £1,000
- Interest rate – 3.04%
- Duration – 18 Years
- End value of savings – £1,699.52
Open a Stocks and Shares Junior ISA
When it comes to investing, a lot rides on your level of knowledge. Unless you have the experience and time to meticulously study fluctuations in the stock market, you may be best to stick to a ready-made portfolio or an actively managed portfolio. Investment ISAs also enjoy tax-free earnings on their investments.
Best Ready Made Investment Junior ISA
Vanguard are one of the most cost-effective providers available with a low annual account fee of just 0.15% per annum, less than half the industry average. We’ve calculated below what an investment of £1,000 would be worth after 18 years, using the return experienced on their LifeStrategy 40% Equity Fund in 2020/21. It’s important to clarify that whilst this was the rate of return in the last year, this rate can go down as well as up and there is no guarantee that this fund will continue to perform at this level. However, with such a long investment period, you will likely have time to ride out any volatility in the market place.
- Amount Deposited – £1,000
- Fund – LifeStrategy 40% Equity Fund
- Risk – Moderate
- Cost for total duration – £70.20
- AR – 5.87%
- Estimated End value – £2,721.78
Best Self Invested Investment Junior ISA
For seasoned traders who would be more comfortable managing a portfolio on behalf of their grandchild, we would recommend Interactive Investor. Interactive Investor offer one of the largest selections of stocks, shares and exchange-traded funds, as well as one flat fee that provides access to all their accounts. Therefore, if you already have an account with them, you can take out a Junior ISA for free, making them a very cost-effective solution. They also offer a good range of ethical investments should you wish to invest in your grandchild’s future in this sense.
Due to the fact that this option is listed for grandparents who are comfortable making investments on behalf of their grandchildren, it is impossible to predict what the value of your investment could be worth after 18 years. However, annual charges lie between £120 and £240 and II have a dealing charge of £7.99 per trade.
Open a Junior Self Invested Personal Pension (SIPP)
Retirement may seem a long way off for your grandchildren, but that is why investing into a Junior SIPP now will provide them with such great returns when the time comes for them to retire. Grandparents are able to save money into a Junior SIPP up to a maximum of £3,600 per year and the government will add a further 20% of your contributions in tax relief. With compound interest, this could be a very efficient way to save for your grandchild.
However, there are some downsides to taking this route. This money is tied up until your grandchild reaches the age of 55 and this is set to increase, which means that your grandchild will have no access to the money to purchase their first home or pay for their student debt, all of which could be somewhat frustrating.
The other consideration before embarking down this route is that whilst the 20% tax relief is often considered free money, the truth is that 75% of pension withdrawals are subject to tax, which means that most of the money will be taxed when the time comes to access their pension.
That being said, for grandparents who are undeterred by these factors, our top pick for Junior Self Invested Personal Pension is Fidelity.
Fidelity provide access to unit trusts, investment trusts and ETFs with no service fee. They have thousands of funds and shares to choose from and take either regular monthly contributions or lump sums. One fee that it is worth being aware of is the £30 trading fee if you wish to trade over the phone, otherwise, online trades will set you back just £10 per trade. As the pension is not available when your grandchild reaches the age of 18, and it is impossible to predict how the pension rules may change between now and when your grandchild reaches retirement age, we have not made any forecast on what your investment may be worth.
‘There is nothing certain in life other than death and taxes.’ Said Benjamin Franklin, by all accounts.
You may be wondering how saving for your grandchild will affect inheritance tax. Inheritance tax is billed at a rate of 40% on money, property and possessions you bequest to your children and grandchildren over £475,000. Of course, everyone wants to ensure that the bulk of their estate is passed to their loved ones and not lost to inheritance tax, and the good news is that everyone has an allowance of £3,000 that they can gift to loved ones, completely tax-free. This amount won’t be counted as part of your estate for tax purposes.
Frequently Asked Questions
Can I set up a savings account for a grandchild?
Yes, with some basic documentation, you are totally at liberty to open children’s savings accounts for your grandchildren. You can then pay into children’s savings accounts as a lump sum or by regular instalments.
Will my grandchildren’s savings be safe using these methods?
Yes, the above recommendations are all safe ways to save for your grandchildren. If you decide on a provider that we have not listed above for your grandchild’s savings, please ensure that they are authorised and regulated by the Financial Conduct Authority.
Are savings bonds a good investment for grandchildren?
Historically savings bonds were a popular option for saving for children. They can be opened by anyone, and offer fixed-term savings that can safely lock their money away. However, at the time of writing this article, you will struggle to find a savings bond with an interest rate that can match the interest rate detailed above on an ordinary savings account. Therefore, we are not recommending savings bonds at this time.
What is the most tax-efficient way to save money for my grandchildren?
There are several ways to ensure you are being tax efficient with your grandchildren’s savings. Firstly, an ISA will give you a saving vehicle that is free of any income tax. A Junior SIPP will attract a healthy government tax rebate of 20% of the value of your contributions if you are happy for your grandchildren to wait until retirement age to access the money. It is also wise to stay within the £3,000 limit each tax year of money you can ‘gift’ without attracting any inheritance tax.
Antonia is the Financial Editor at InvestingReviews.co.uk and brings a wealth of experience, having written for various industries over the past 10 years.
Her investment platform reviews, news, blogs and guides are meticulously researched, fact checked, and updated on a regular basis.