Below are the options available for those looking to save up some money for their grandchildren - whether it be for a university education, a flat deposit, or even travels.

Child Trust Fund
Tax Exempt Saving Plans
Unit Trust For Children
National Savings Children Bonus Bonds
Stakeholder Pensions

Child Trust Funds

The best place to start is to put money aside in your grandchild's CHILD TRUST FUND (CTF). The Child Trust Fund is a long-term savings and investment plan established by the government to encourage parents to save for their children's future. All children over 5 years old will have received an initial £250 in vouchers from the government to open their CTF accounts, with a further £250 when they reach 7 years of age. The CTF can be topped up by anyone, including family members, by up to £1,200 each year and is free from income tax or capital gains tax.

Tax Exempt Saving Plans

If your grandchild is over the age where they are eligible for the Child Trust Fund, or are not entitled to it for some other reason, there are alternative savings products on the market that are just as tax efficient. One such option is the TAX EXEMPT SAVING PLAN (TESP) offered by most building societies. TESPs provide parents and grandparents with a simple way to save up to £25 for each family member per month. Like the CTF, it is free from income tax and capital gains tax.

Unit Trust For Children

You can also opt to set up a trust fund for your grandchildren in the form of a UNIT TRUST FOR CHILDREN. This allows you as the trustee to set up an account in your name for the benefit of the child. As children under 18 may not legally hold shares, you can save on their behalf and identify your grandchild as the beneficiary. Starting your own savings account for your grandchildren also makes sense tax-wise; children are entitled to a personal allowance of £6,475 (2009/10) like any independent person, and since the vast majority of children do not earn above this allowance, their savings are tax-free (make sure their parents fill in a R85).

National Savings Childrens Bonus Bonds

Another option for a tax free long-term investment is a Children’s Bonus Bond from National Savings and Investments, which can be opened by a grandparent or adult for a child under the age of 16. After investing a lump sum to open the account, interest is added every year along with a bonus every five years until the child reaches 21. You can add more instalments into the account in addition to this, at up to £3,000 per issue for each child. The bond is owned by the child but controlled by their parents until their 16th birthday, at which point they are entitled to manage the bond themselves.

There are other children’s savings account options, with the general trend being that the more restrictive the account, the higher rates of interest it will attract.

Stakeholder Pensions

Although it may seem a long way off, you can set up a stakeholder children's pension for your grandchildren and invest up to £3,600 gross each tax year. However, this is a long term investment and there is always a concern that pensions rules may change.

Other related articles from MyEggNest

Unit Trust for Children

Children's Tax Exempt Savings Plans (TESPs)

Children's Stakeholder Pensions

Children's Individual Saving Accounts (ISAs)

Children's Bank and Building Society Accounts

Investment Trust for Children

National Savings and Investments (NS&I)

Alternatives to the Child Trust Fund Accounts

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