How to save safely for your grandchildren

If you slip up they may never get the cash – so follow our guide

IT’s a simple act of generosity most grandparents have thought about.

But setting up a savings account for a grandchild where you stay in control of the cash can be utterly baffling.

Money Mail trawled through the information provided by the big banks and building societies and found grandparents are given little or no guidance. The banks fail to make clear the need to fill in vital forms if you want a say on when the cash is withdrawn and by whom. Few banks provide the forms on their websites. some don’t even mention them. Grandparents who do find the right forms are then bogged down with reams of cumbersome paperwork.

Money Mail receives a regular stream of letters from grandparents keen to open a savings account for their grandchildren. But they fear young relatives will get the money before they reach the age of 18 — or may not even get it at all — and don’t know how to safeguard the cash. Grandparents can lose all control if there is an acrimonious divorce or a harsh family split.

The problem is set to get worse as more so-called Baby Boomers look to downsize and want to pass on some of their extra cash for their grandchildren to use for university fees, or towards a deposit on a first home.

Ordinary savings accounts often give the child control from the age of 16 — even if you as the grandparent are named on the account.

To ensure they don’t get the money until they are 18, you need to set up the account as a ‘bare trust’. This is a trust where you as the grandparent — or anyone you choose — is the trustee. The money is, under law, the property of your grandchild — the beneficiary. They automatically have access to it when they turn 18.

In the meantime, any statements or letters about the account are sent to you as the trustee, who is also in charge of making deposits and withdrawals.

The interest is taxed as your grandchild’s in the eyes of HM Revenue & Customs. Children have the same tax allowance as adults — a personal allowance of £11,500 for this tax year — and a savings allowance which gives them the first £1,000 of savings interest a year tax-free.

Gareth Hughes, partner and trust specialist at solicitors Laytons, says: ‘We find the big banks are not easy to deal with when you want to set up a bare trust. They tend to put hurdles in the way and demand reams of paperwork even if you just want to save a small amount each month.

‘You can find you speak to a different person each time. They are not always up to speed as to how these trusts work and read off a script. I tend to use the smaller private banks with a more personal approach.’

Ian Bond, director at Black Country law firm Talbots Law and incoming chair of the Law society wills and equity committee, says: ‘setting up a simple bare trust should be easy. But banks use the same approach whether you want to give £10,000 or save £10 a month and it puts grandparents off.

‘The Law society would love to work with banks and building societies to make it simpler to set up trustee accounts to save small amounts to pass on to grandchildren.’

Even when opening an account for a child, banks and building societies must obey anti-money laundering rules including the new Money Laundering, Terrorist Financing and Transfer of Funds regulations, which came into force on June 26.

It means you need to go through the rigmarole of proving your own identity as well as that of your grandchild. That means producing their birth certificate and proof of where their parents live.

skipton Building society is among the few providers which explain how to open an account as a bare trust and provides all the forms.

It introduced the service in response to customer demand for accounts they can control until the child reached 18. One in six of its Children’s saver accounts is now held in this way.

Principality Bs joined it last month, while Nationwide has told Money Mail it is currently reviewing its information with the aim of improving it. Premium Bonds are out if you want to keep control of the money. National savings & Investments (Ns&I) automatically send any prizes or withdrawals to the nominated parent or legal guardian, no matter who bought them. But you can open an Ns&I Investment Account. With these the money automatically passes to the child when they reach their 16th birthday — unless it is in a trust.

If you want your grandchild to have the money later than their 18th birthday you have to set up a discretionary trust. Then as the trustee you can decide when they receive it. You need advice to set one up as tax liabilities differ depending on how you do it.