As a grandparent, you may want to give your grandchildren a head start and help them financially if you can. But before you give them cash or open a savings account, you need to consider all your options, and the tax implications. Here’s what you need to know.
Related: Children's saving account guide
Types of savings accounts for children
Premium Bonds
National Savings & Investments (NS&I) Children's Bonds: These bonds are government-backed savings products that are designed for children under the age of 16. After that age the child takes the account over. You can purchase Premium Bonds in amounts ranging from £25 to £50,000. Each bond has a unique number that is entered into the monthly prize draw. Prizes range from £25 to £1 million and are tax-free. The more bonds you hold, the greater your chances of winning. However, it's important to note that there is no guarantee that you will win any prizes.
Pros:
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Premium Bonds are supported by the Government and there is no way to lose money
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Premium Bonds are tax free savings
Cons:
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The worst-case scenario is that the bonds purchased are never chosen in a prize draw
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The amount in the account remains the same and doesn’t grow unless you win.
Junior ISA
Junior Individual Savings Account (JISA) is a tax-free savings account designed for children under the age of 18 that replaced the Child Trust Fund. You can invest up to £9,000 per tax year, and any interest or investment growth is tax-free. There are 2 types of Junior ISA: a cash Junior ISA with interest and a stocks and shares Junior ISA, which is invested for you and gives you capital growth or dividends.
Related: What’s the difference between a child trust fund and a Junior ISA?
Pros
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Once a Junior ISA is set up by parents, you can make contributions with them up to the annual limit of £9000 a year.
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The £9000 a year can be divided between a cash JISA and a stocks and shares JISA
Cons
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Grandparents are not able to open a Junior Isa for their grandchildren
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Only £9000 a year can be saved in an JISA, so your contribution depends on how much others are putting in.
Regular children’s savings accounts
A children's savings account is an account that can only be opened on behalf of a child under the age of 18. They run just like adult savings accounts and are offered by banks and building societies. Your grandchild can add to the savings account too, which can encourage them to develop good savings habits.
Pros:
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You can open a savings account with just £1 for any child aged up to 18
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These accounts have easy and instant access
Cons:
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Interest rates don’t tend to be that high for children’s savings accounts so aren’t always the best option for long term savings
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Easy access may tempt children to withdraw the money
Child pension
A child pension is a savings scheme set up on behalf of a child under 18 by a parent that anyone can pay into. It is a way to save for your grandchild's retirement and has many features of adult pensions, including tax relief and investment returns that are also shielded from capital gains tax and income tax.
Pros:
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You can pay a maximum of £2,880 a year into a child's pension
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The current government pension tax relief of 20%, this sum would rise to £3,600
Cons:
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Your grandchild may need to access money in the future, but this money will be locked-in until their retirement age
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Child pensions can’t help with house purchases or paying for university education
Child trust fund
The Child Trust Fund is now what’s known as a ‘dead’ government scheme that was introduced in 2005 and has since been replaced by JISAs. However, if your grandchild was born between September 1, 2002, and January 2, 2011, they will have a CTF account that can be added to or converted to a JISA.
Pros:
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You can contribute up to £9,000 per tax year to a CTF, and the account grows tax-free
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You can convert a CTF to a Junior ISA
Cons:
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You can’t pay into CTF as well as a junior ISA
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CTF interest rates are low
A Trust
A trust is a legal arrangement that allows you to set aside assets for your grandchild's benefit. The beneficiary (in this case, your grandchild) has a right to the trust assets at age 18. You can gift up to £3,000 per tax year to a trust, and it will be immediately outside of your estate for inheritance tax (IHT) purposes.
Pros:
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You can specify when the funds are to be distributed to your grandchild, it can be older than 18
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You can ensure the trust is used for a specific purpose, such as university education or buying a first home.
Cons:
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If you die within seven years of making the gift, it may still be subject to Inheritance tax.
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You need to pay for legal advice to set up a trust
Related: What is saving and why is it important for kids?
What’s the best way to save for my grandchild?
The best way to save for your grandchild is to pick a savings account that best suits your situation and your investment objectives.
For example if you want to save for their future university education or a house deposit, you should opt for a children’s savings account that offers good long term returns. You should also only put aside as much as you can comfortably afford for your grandchildren.
What do I need to open savings accounts for my grandchildren?
You can open a number of savings accounts for your grandchildren with their birth certificate. You can then pay into children’s savings accounts as a lump sum or by regular instalments. However, their parents will need to be the ones that open a Junior ISA and then you can pay into it.
What is the most tax-efficient way to save money for my grandchildren?
There are several ways to make sure you are being tax efficient with savings for your grandchildren. A Junior ISA, a child pension and premium bonds are all long term tax-free accounts.
How much can I save tax-free for my grandchild?
There's no tax to pay on children's savings accounts. You can also:
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Pay in a maximum of £2,880 a year into a child's pension, and with the current government pension tax relief of 20%, this sum would rise to £3,600.
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Give up to £3,000 as part of your gift allowance each year free from inheritance tax.
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Pay £9000 into a Junior ISAs a year
Related: How much money can grandparents gift grandchildren in the UK?
Things to consider when opening a savings account for children
While the gift of financial security is a good one, you should never put savings for your grandchild over your own financial security.
Once you have an amount you’d like to save:
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Look at the interest rate, as this is an essential factor to consider to ensure that your money is working as hard as possible for your grandchild.
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Know what your savings are doing. Some savings accounts may invest your funds in the stock market, which can carry an element of investment risk.
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Be sure that you understand the investment strategy and the level of risk, before investing.
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Fees and charges: Some savings accounts charge monthly maintenance fees or require a minimum balance. Look for accounts with low fees and charges to maximise your savings.
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Lastly, consider access to the funds. Does the money need to be easily accessible or are you fine with restrictions on withdrawals or the money being locked up until your grandchild reaches 18 years of age?
How can I make sure my grandchild is responsible with the money I save for them?
Saving money for your grandchild is a great way to invest in their future, but it's important to make sure they are responsible with the funds.
Says Louise Hill, COO and co-founder of GoHenry, “Managing money effectively demands a sophisticated set of skills ranging from understanding the value of money to seeing the importance of saving and investing. Recent CBI Economics analysis commissioned by GoHenry and Wilson Wright underlines that financial literacy raises early-career earnings prospects by up to 28% and that children with high financial literacy are more likely to start a business. It’s why we all kids need to know the basics of financial responsibility.”
With that in mind, here are some tips to help ensure your grandchild is financially literate so they understand how to use the money when they become an adult.
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From an early age, have an open and honest conversation with your grandchild about the purpose of the savings account and the expectations around its use. Explain that the money is intended for their future education, a down payment on a home, or other significant expenses.
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Money habits are set by age 7, so the sooner you start teaching your grandchildren to be smart with money, the better.
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Teach your grandchild about the value of money and how to manage it responsibly.
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Involve them in the savings process: Encourage your grandchild to contribute to the savings account, so they have a sense of ownership and responsibility. This could be through earning money from chores or part-time jobs, or through pocket money.
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Make sure they are learning about personal finance, spending wisely, budgeting, and more importantly understand the purpose of their long-term savings.
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Use a trust or other legal structure: Consider setting up a trust or other legal structure to manage the savings account. This can provide more control over how the funds are used and when they are accessed, ensuring they are used responsibly.
How can GoHenry help?
GoHenry is a prepaid kids debit card that not only allows your child to participate in the digital economy but also enables them to set savings goals within their app. You can automate their savings to come out on the day they get their pocket money, set up short-term and long-term savings and help them to understand the key principles of saving and spending.
Money Missions on the GoHenry app takes these lessons further, helping kids to understand the value of money, investing and how tax works through bite size lessons and videos.
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