What are the best savings accounts for grandchildren? | Pension Times (2024)

Putting aside money for grandchildren can be a great way to help provide for them in the future. Thanks to compounding interest, the cash you save through the years can add up to a significant amount. Many savings products allow both parents or grandparents (or another legal guardian) to determine when a child can access their savings. This is typically, but not always, when a child reaches their 18th birthday.

There are many ways a grandparent can put money aside for their grandchildren to enjoy in the future. When we discuss the types of savings accounts for children below, we'll also discuss how those products are structured to help you determine the best solution for you. Depending on your goals for your grandchildren and your and their circ*mstances, some savings products will be more suitable than others. Therefore, you must consider your situation to help with budgeting and making the most of the advantages that the below bank accounts and saver products offer.

Types of savings accounts for children

A grandparent can open the following savings accounts for their grandchildren, or at the very least pay into accounts once they have been opened. However, if you want total control of the money, you will need to invest in your own savings products or pension. This way, you will have more to leave or give to your grandchildren as and when you want.

Premium Bonds

Grandparents can buy Premium Bonds for as little as £25 for a child under 16. The maximum amount they can buy is up to £50,000. If a grandparent buys premium bonds for a grandchild, they must declare a parent or legal guardian to manage them. Doing so requires proof of address and date of birth.

The advantages of Premium Bonds are that by holding them, you are entering your child into a prize draw for a chance to win tax-free prizes each and every month. Prizes range from £25 to £1 million, although there are only two £1 million prizes each month. However, it is different to a lottery as your grandchild will not lose the initial investment amount. In addition, they can choose to cash in their Premium Bonds should they wish when they are allowed. They are purchased through the National Savings and Investments (NS&I).

If you are looking for an investment option with a guaranteed return, though, they are perhaps not the best choice. There is by no means a sure thing that your grandchild would win even £25, let alone the big £1 million jackpot. As a result, with the effects of inflation, there is a high chance that any lump sum you put into Premium Bonds in a child's name will lose value.

Junior ISA

A Junior ISA has some similarities to an adult ISA and some crucial differences. Similarities are the annual limit in any tax year on how much you can invest into a Junior ISA - currently £9,000. Plus, like adult ISAs, there is both a Junior Cash ISA and a Stocks and Shares Junior ISA.

The broad advantages to these products are the same, however. Firstly, opening a Junior ISA (be it a Cash or Stocks and Shares ISA) is tax-efficient. It is a common misconception that all children's earnings are tax-free. However, they pay income tax to HMRC when they breach the personal allowance, currently £12,570. So, if your grandchild is earning more than that, an ISA is helpful because it will not attract additional tax payments regardless of the return. That can be extremely helpful for Stocks and Shares ISAs, which may have years where returns are incredibly advantageous.

While only a child's parent or legal guardian can open a Junior ISA, anyone can pay into them, so building up a substantial sum over time is possible. This is especially true when the effects of compounding are taken into consideration.

On the flip side, while stocks and share ISAs may have the potential to make significant gains, there is always the risk that you lose the value of your investment on the stock market. Even with the tax rules surrounding ISAs, that is definitely a downside you need to consider. With Cash ISAs, that risk is lower as the FSCS covers your holdings at a bank, building society, or credit union up to the value of £85,000. However, the downside to Cash ISAs is that they historically offer paltry interest rates.

Regular savings accounts

Regular savings accounts are another option that grandparents may choose for their grandchildren. One of the fantastic benefits of a children's savings account is that they offer some pretty high-interest rates compared to regular savings accounts. Plus, a significant advantage of opening these accounts and paying into it as a grandparent is that the interest earned is not taxed as it would be if it came from a parent. When it comes from a parent, any interest over £100 is taxed as if it was part of a parent’s earnings. That can really eat into those returns.

A savings account for a child can be an excellent way to teach them the value of money as they can also pay into the account and see their money grow. They are a good option if you want to pay into an account slowly over time or do not have a lump sum ready to invest. The high-interest rates (or AER) offered are only usually paid if a minimum amount is paid in each month. Another benefit to these accounts is that the money you put into them does not have to be locked away as it may be in fixed-term accounts or fixed-term bonds.

They can even be a good option if you are looking to open a current account with a debit card for your grandchild to use as and when you feel they are able. Finally, they can be easily opened by grandparents for their grandchildren. Often, only a birth certificate is required.

Junior pension

A junior pension or a junior SIPP may sound a little like overkill when it comes to putting away money for a grandchild, but having a personal pension all set up when your grandchild turns 18 can be hugely beneficial. While many of us would always have liked money towards our first home or first car when we were young adults, many of us would also be very glad of help towards our pension come retirement day. You can start a junior SIPP for a newborn, and even at that tender age, they will benefit from the same tax rules that other SIPPs do. So, for every £1 invested for your grandchild in a junior SIPP, the Government will add another 25p on top.

It is possible to pay £2,880 into a SIPP every tax year for a grandchild. With the Government’s payment, that grows to £3,600. In addition to that benefit, you may take comfort in that your grandchild will not be able to access that money until they are at least 55. Ultimately, though, the best thing about a junior SIPP is the effect of compounding over so many decades. While there is always the chance that an investment's value will decrease, pension fund managers have long used stock markets as an effective means of growing money. So even if you cannot stretch to the total annual amount, you can open these products with something as low as £25 a month.

Child trust fund

A child trust fund or a bare trust is a good option if you want to put money towards your grandchild's future without having to forgo any control. When you set up a child trust fund, you name the grandchild in question and also determine who manages that trust. It does not have to be you, but you may want it to be. Crucially, that means your grandchildren cannot access the money before you deem that they are old enough to be responsible with it. Additionally, trusts can pay out cash to cover bills for the child's benefit, like school fees.

Child trusts attract a great deal of interest since they offer tax efficiencies. The investments held within a bare trust account are technically held by your grandchild, so any interest is taxed at their tax rate. Grandparents can pay in up to £3,000 a year as a gift, and that will always be inheritance tax-free if you do not give any gifts to anyone else that year. That is known as your annual exemption allowance.

What to consider when opening a savings account for children

When you are opening a savings account for children, you need to consider many ideas to help you pick the best savings product for both you and them. Investment timelines may sound a little silly when talking about a child’s investment outlook, but what are you actually investing this money for? Do you want them to have a large pot of money when they turn 18, or do you simply want to give them access to a little bit of pocket money every now and then?

Knowing their timeline will then help you decide how much risk you can take on. Broadly speaking, the longer the investment timeline, the riskier the investment you can make. A Stocks and Shares ISA, for example, could be a safe product if you open one for a newborn grandchild to access when they turn 18, as well as having the benefit of tax relief.

Finally, whatever product you choose for your grandchildren, ensure the provider is regulated by the Financial Conduct Authority so you can be safe in the knowledge that your savings are protected.