Putting aside money for grandchildren has long been the prerogative of grandparents. Saving for grandchildren is better than simply sticking cash or a cheque in an envelope, and over time will grow into a much bigger gift long after plastic toys and flashing gadgets have been cast aside. It might not be the most immediately gratifying of gifts but saving for grandchildren will help them make a more financially secure start to adult life – from putting their first deposit on a home to taking a gap year and travelling the world.

Saving for grandchildren – where to start

There are lots of ways to save for grandchildren. While your own circumstances will determine how much and where you stash the cash, some ways to save are more tax efficient than others. Ensuring you get the best and most tax-efficient return on your savings means more money for your grandchildren. If you’re looking to regularly save over 18 to 21 years, those savings could grow into a generous gift when grandchildren become adults.

Making a will and gifting to grandchildren

While not strictly saving for grandchildren, making a will is important. However, it may not be the most tax-efficient way to pass on money. Individuals have an inheritance tax allowance of £325,000, which means the first £325,000 of your estate can be passed on tax-free with the remainder is taxed at 40%. This means anything above the threshold is reduced by a whopping 40%, leaving far less in the pot to share out between beneficiaries such as grandchildren.

There are some additional rules if you leave your main residence to direct descendants such as grandchildren. Read our guide to making a willfor details on using the main residence tax-relief to add £150,000 to your tax-free allowance.

There are, however, some ways to minimise inheritance tax. Money given as a gift over £3,000 will be subject to inheritance tax if you were to die within seven years of gifting it.

However, you can freely gift up to £3,000 each year to grandchildren. You can also give away what is seen as a trivial monetary gift of £250 each year to anyone.

If your grandchildren are getting married, you can also take advantage of another tax relief. It’s possible to gift up to £2,500 tax free to a grandchild getting married. The gift needs to be made in the days before or on the day itself to qualify.

Learn how to make a will – from dividing your estate to choosing an executor – with our guide Making a will: how to make a will.

Cash or shares when saving for grandchildren?

It all depends on your appetite for risk. Generally, investments in the stock market tend to perform far better than simply holding onto cash or sticking money into a high-street bank account.

Choose cashing savings – If you aren’t planning on investing much and are risk adverse, then putting money into a high interest account guarantees the money will be secure for your grandchildren. They may not have such a high return but you’ll enjoy peace of mind that the money you have saved will be there for your grandchildren. Make sure you keep an eye on the interest rate and be prepared to move accounts to ensure you get the best interest rate over the years.

Choose stocks and share investments – If you’ve more of a risk appetite and are investing over the longer term, then stocks and shares are a good option. You’ll need to get independent financial advice to make sure this is the right investment vehicle for you and remember that your capital investment – the amount of money you put in – could be less at the end of the investment period. Consider stock and share ISAs if you’re looking to lock money away for at least 5-10 years so your investment can grow.

Options for saving for grandchildren

If you’re a grandparent looking to save for grandchildren, there are lots of savings options to pick from. You can choose from basic cash savings accounts and junior ISAs up to more complex trusts. We’ve collected together some of the most popular, but with all investments it’s worth seeking independent financial advice.

Looking for an independent financial advisor (IFA)? Read our guide to pension advisors – how to find the best IFA as financial advisors can usual provide advice on all your financial options.

Premium Bonds – A favourite of grandparents throughout the ages and who can resist the thrill of the Electronic Random Number Indicator Equipment (fondly known as Ernie) creating millionaires since 1956. Premium Bonds work on a monthly prize basis, with a minimum investment (or stake) of £100. Each bond is entered into a prize draw, with prizes ranging from £25 to £1m. You won’t pay tax on any winnings, and you’ll own the bond with the ability to give it to any child when they reach the age of 16.

Cash savings – One of the more basic ways of saving for grandchildren. You can open an account in your grandchild’s name. You’ll need to visit a branch of the bank you’d like to open the account with armed with identification documentation for your grandchild, such as passport. The good news is that your personal tax allowance, currently £11,850, is tax free when put into the account. Ensure you complete form R85 so tax isn’t automatically deducted. Look for cash savings with high interest rates and don’t worry about unlimited access – restricted access accounts tend to pay a higher interest. Review the interest rate yearly and shop around, moving the account if the interest rate falls.

Junior ISA – There are various ISA products available, and the good news is that Junior ISAs generally offer slightly better interest rates than ordinary cash ISAs. ISAs allow any money invested to be free of tax, and you can put up to £4,260 into the Junior ISA each year. The entire ISA remains tax-free until it converts to an adult cash ISA when your grandchild turns 18. Unfortunately, you can’t open the ISA – it needs to be set up by a parent or legal guardian – but once set up you can directly pay into the Junior ISA up to the £4,260 limit. There are different types, including cash and stocks and shares Junior ISAs, and some are currently paying around 2-3-times the interest level of standard cash ISAs.

Lifetime ISA – This is an extension of the Junior ISA for older grandchildren aged between 18-39. It’s exclusively aimed at helping your grandchild buy their first home. It works by you investing up to £4,000 into the ISA each year. The government effectively ‘tops up’ your contribution with an extra 25% – adding a whopping £1,000 each year – but you’ll lose this bonus if funds are taken early. The Lifetime ISA needs to be ‘redeemed’ on a house purchase only – it can’t be used to buy a car, for example.

Junior SIPP – SIPP is short for self-invested personal pension, and this is for grandparents saving for grandchildren who are really looking ahead. Free from capital gains and income tax, it allows you to claim tax relief at 20% on up to £3,600 per year. This means that you only need to invest £2,880 for the total year investment to be £3,600 with tax relief. You can start at any age, but there is a considerable catch. Your grandchild will not be able to access the money until they reach 57 years of age. Designed to help fund their retirement, this is one long-term saving for grandchildren gift you can give.

Trusts – Also known as bare trusts, this is simply a trust you set up that your grandchild can access when they turn 18. You can save whatever amount you like into a trust, but you can no longer claim ownership on the money – it’s exclusively for your grandchild. It is possible to draw money from a trust to pay for essentials that directly relate to the wellbeing of your grandchild, such as medical care or education costs. Grandparents also have an advantage with bare trusts. Unlike parents, any money put into a trust that earns in excess of £100 in income is tax free – parents have to pay income tax at their marginal rate.