Saving for the Grandkids

Q: "My husband has recently passed away, leaving me a lump sum of £200,000 from his life insurance. I have two grandchildren aged 13 and 15, and I'd like to leave them £50,000 each for their 18th birthdays. I'm very cautious, so I don't want to invest the money, but want the best return I can get from a savings account."

A: If you're risk-averse when it comes to your money but you don't need access to it, you should take advantage of the higher rates available on fixed-term bonds.

However, remember that interest rates may rise in the future, so it's probably best not to commit for longer than about three years.

Keep a maximum of £50,000 with one institution or banking group. That way, if the bank gets into difficulties, the money will be fully covered by the Financial Services Compensation Scheme (FSCS). This limit will increase on 31 December to the sterling equivalent of €100,000.

You could hold the money in a bare trust on your grandchildrens' behalf until they reach 18. You can do this very simply with a designated account in your name but followed by the child's initials in brackets.

This means interest is taxed as the child's – they have the same tax-free allowance threshold (£6,475 in 2010/11) as the rest of us. If the money isn't in a bare trust, as a taxpayer, you will be liable to tax on the interest.

Moneywise's best savings rates 


Francis Klonowski, independent financial adviser at Klonowski & Co in Leeds, suggests a three-year bond in the grandchild's name.

"I recommend the Cheshire Building Society three-year bond with a fixed rate of 3.95% over the whole term. You can deposit as little as £100, the term suits your timescale, and you can make further investments as you go along. I also like the Northern Rock three-year fixed-rate bond, paying 3.8%."

Patrick Connolly, certified financial planner at AWD Chase de Vere, recommends a two-year bond held in your name.

"I recommend the Santander two-year fixed-rate bond. You retain complete discretion over when you pass the funds to your grandchildren, and the interest rate of 3.55% AER is competitive. Another option is the Bank of Scotland's two-year fixed-term bond, paying 3.15% on deposits from £500."