Give a savings account to your grandchildren – they will thank you for it later!

When children write their Christmas lists, they usually ask for toys, games or new gadgets. So if you give your kids or grandkids a little nest egg instead, their faces might not light up on Christmas morning, but they might thank you for it later.

According to High Street bank Halifax, parents spend around £110 on Christmas presents for each child. By putting even a fraction of this into the right account, it can grow in value over the years to help with college costs or a first home down the line.

Regular giving can also reduce the estate taxes that may be due on your estate when you die.

However, with so many different types of accounts for kids to choose from, it can be difficult to know where to start. Here we explain where you can best give your children or grandchildren a nest egg – and how much it could be worth when they grow up.

Premium bonds

Premium Bonds have been a popular Christmas gift for more than sixty years. They allow the giver to donate cash while also giving their loved one the chance to win big.

According to National Savings and Investments (NS&I), children won more than a million Premium Bond prizes worth more than £72 million in the year to November.

The Premium Bond price percentage corresponds to a return of approximately 4.65 percent. But some holders will win prizes that earn them a higher rate, while others will earn nothing. The odds of winning are 21,000 to one for every £1 bond in the monthly prize draw. But the more connections your child has, the more likely he is to win a prize.

NS&I is also government backed, meaning every penny invested up to £1 million is protected. Other savings providers usually have protection on deposits up to £85,000.

Anyone can purchase Premium Bonds for a child under 16, making them a popular gift from grandparents or extended family members.

You can register online or by post and you can ask NS&I to send you an electronic or paper gift card that you can pass on to the child. If the child is under 16 years of age, a designated parent or guardian can manage the Bonds. You must ensure that they are willing to do so and agree to you passing on their details to NS&I.

However, while Premium Bonds are a popular option, they are unlikely to be the most lucrative way to grow a child's savings.

Laura Suter from investment platform AJ Bell says that although the Premium Bond prize fund is now at its highest level in 24 years, children will still earn less than a savings account and win nothing.

“With inflation still high, the purchasing power of your gift will decrease year after year, especially if the recipient does not redeem the money for a long time,” she says.

Savings accounts for children

Several savings accounts for children offer generous rates, above five percent. The top rates include a bill paying 5.8 per cent at Saffron Building Society and Coventry Building Society at 5.25 per cent.

You can donate a fixed amount or set up a monthly direct debit. For example, if you deposit €100 per month into the Saffron BS account, the child would earn €37.70 in interest by next Christmas. If you are not the child's parent or guardian, you may need to ask to open the account, which you can then make deposits into.

Shop around for the best rates and check interest rates regularly as savings providers often reduce them after a year or two and your loved one may not be getting the good deal you thought they were.

Junior Isas

If you want to give a larger amount of money, a Junior Isa (Jisa) is a good option. Only parents and guardians can open one for a child under 16, but anyone can pay into the account. You can deposit up to £9,000 into a Jisa each tax year ending 5 April.

There are two types of Jisas to choose from: cash or stocks and shares. A cash Isa is similar to a normal savings account, but any interest earned is tax-free.

Coventry Building Society offers a best-buy Jisa, which pays 4.95 per cent. A £9,000 savings account with Coventry would earn £445.50 in interest after a year.

Other top rates are 4.8 per cent at Loughborough Building Society and 4.75 per cent at Skipton Building Society.

However, if the child does not have access to his money for several years, it is better to opt for a stocks and shares Jisa, which invests his money in the stock market. The amount of money they end up with depends on how well your investment performs and there is an element of risk.

However, over most periods, a well-diversified investment portfolio typically provides better returns than a savings account.

Alice Guy, of investment platform Interactive Investor, says: 'Shares tend to grow much more over time than cash, so the amounts invested when children are young can snowball into much more value as they are invested. My own teenagers have a stocks and shares Isa, which is also a great way to teach them how to invest.”

Investment income earned in stocks and shares Isa is also free of all tax.

If you can put £9,000 into a share Jisa every year, your child would have thrown away £240,041 by the time he turns 18, according to AJ Bell's analysis. This assumes that the investment grows by 4 percent every year after deducting costs.

If you paid £250 a year into the same account, this would result in a savings pot of £6,668 after 18 years. Stocks and shares Isas also have fees attached, which are usually less than one percent. Providers include Hargreaves Lansdown, Interactive Investor, Vanguard, AJ Bell and Wealthify.

Pensions

It may feel like madness to save for a child's retirement when it is still so far away. And you may want to prioritize saving in Isas first so they can access the money for financial purposes in early adulthood.

But if you can afford it, paying into a pension can also be a wonderful gift. Thanks to the power of compound interest, the longer the money is saved, the more it will grow over the years.

If you pay £2,880 into a child's pension every year, they would have £107,619 by the time they turn 18, according to investment platform Bestinvest. This assumes an annual growth rate of 5 percent and does not take platform costs into account.

Even if your child decides not to pay into this account after they reach adulthood, the pension could potentially be worth more than £1 million by the time they turn 62.

The best way to put money aside for your child's later years is to open a Junior Self-Invested Personal Pension (Sipp). A parent or guardian can pay up to £2,880 into a junior Sipp each tax year, which is topped up by the government with £720 in tax relief.

Any money saved in a Sipp is exempt from capital gains and dividends tax and can be accessed once you reach a certain age (currently 55, but this figure is rising).

Bestinvest's Alice Haine says a child may not thank their parents for the retirement gift, but will do so later.

“If a parent wants to encourage their child to save for longer-term goals, a Sipp can deliver big benefits later in life, with any money put into these accounts growing tax-free,” she says .