Saving for a grandchild is a common goal for many grandparents. The ability to give a grandchild a financial headstart and contribute to milestones in their lives is a fantastic achievement to aim for.

Paragon Bank research shows that 16% of grandparents have made a one-off cash gift to their grandchildren, whilst a further 8% make regular monthly contributions to a grandchild.

We have identified five pathways grandparents can take to kickstart a grandchild’s financial journey, even before they’ve left the maternity ward!

Children’s savings account

Opening a high interest children’s savings account is a great first step in teaching your grandchild how to manage money and to teach them that with earning interest, their money can make money.

Opening a children’s saving account is simple, all you need is proof of identity, such as their birth certificate. And a bonus is the interest on a child’s account won’t be taxed when it comes from the grandparent!

However, it’s important to consider Inheritance Tax (IHT) when contemplating cash gifts to family. IHT only needs to be paid if the value of the estate is above a £325,000 threshold. Anything above this amount is typically taxed at 40% and it could leave the grandchild with a tax bill if not managed effectively.  

Tax rules enable a gift of money to become exempt from inheritance tax if the person giving it lives for seven years afterwards. (The amount of tax due is based on a sliding scale and is related to the date of death and when the gift was given, but there are exemptions you can take advantage of. For example, each grandparent can gift up to £3,000 in any one tax year, exempt from IHT.

If the whole £3,000 is not used in any single tax year, the balance can be carried forward to the next tax year, although there is a limit of two years on this. For example, you can gift £6,000 if you don’t use the first year’s allowance, but you cannot go beyond that.

You can also gift £250 to as many people each year as you wish IHT free, although the recipients of this need to be different to the individual you gift the £3,000 to. It’s also important to keep a record of these gifts.

Bare Trusts

Simply put, a bare trust is a legal arrangement where money is set aside for a beneficiary (your grandchild) and an individual is appointed to manage the funds (you or someone else).

This is also a tax efficient option as the assets within a bare trust are taxed as if they belong to your grandchild and they can’t access the funds until they are old enough and financially mature to do so. As long as the contributions have come out of your income and doesn’t affect your standard of living you can pay up to £3,000 or more if you like, per year.

With a bare trust it’s important to note the annual £3,000 allowance includes all assets or cash you give to other people, not just those in the trust. If this agreement is broken the money in the pot will be subject to IHT.

Junior ISAs (JISA)

Grandparents are not able to open their grandchild’s JISA account, but once this is set up by the parent or guardian, the grandparents can make contributions. The annual allowance for the 2022/23 tax year for Junior ISAs is £9,000.

Using a Junior ISA means the only option is for the funds to go straight to the grandchild and can only be accessed by them once they turn 18. There are two options when it comes to the world of JISAs:

• Cash JISA: a tax-free savings account that pays interest
• Stocks and shares JISA: this account is also tax free and the money is invested in equities

Advisers have said staying with a cash ISA is the safe option, however if interest rates are low, investing over a longer period of time, such as 18 years, has a better chance of beating inflation.

Start a Junior Pension

It’s a crazy thought to think about a grandchild’s retirement when they can’t even walk or talk yet, but we say it’s never too early to start saving!

Parents or other family members, such as a generous grandparent, can invest in a junior self-invested personal pension (SIPP) for a child, and it’s topped up by a helpful tax relief too. You can add up to £2,800 to their pension pot every tax year and it will be increased by a £720 tax top up to £3,600.

A junior SIPP is locked away for the money to grow until your grandchild can retire. There is no age limit to when a SIPP can start.

Premium Bonds

It’s like banking lottery, except your grandchild won’t lose the original investment and cash in their Premium Bonds.

Premium Bonds are savings accounts where every month your grandchild could be the lucky winner of tax-free prizes. Every £1 Premium Bond bought from National Savings & Investment (NS&I) is added to a monthly prize draw.

The parent or guardian of the grandchild will need to apply online or via post and manage the money. A grandparent can buy from £25 up to £25,000 worth of Premium Bonds per grandchild under the age of 16.

With all of the above options, it is recommended to receive independent professional advice for your individual circumstances.