Junior Isas turn 10: Should you save in cash or invest?

This week marks the 10 year anniversary of the Junior Isa, which may lead some parents to reflect on whether the tax free savings account has led to some meaningful returns. 

Three fifths of junior Isas are held in cash, according to research by F&C Investment Trust.

However, it appears returns regret has bitten some parents – upon realising the financial returns missed by saving, a third of those parents say they wished they had invested the money instead.

Among Interactive Investor account holders, of those who invested in stocks and shares Jisas there are 110 with a value of more than £100,000 and a further 1,078 with between £50,000 and £100,000.

One lucky account holder already has enough tucked away to pay for the average UK detached house, according to the investment platform.

Junior Isas can be opened for any child living in the UK under the age of 18 and parents can contribute up to £9,000 each tax year.

Parents can either opt to use the tax free wrapper to either save or invest towards their child’s future.

When savings in a cash Jisa all interest earned will be shielded from tax, while those who invest in a stocks and shares Jisa will be shielding any dividends or capital gains from the taxman.

Almost half of parents favour the cash Jisa because they think it is a safer option than investing, according to F&C Investment Trust.

Junior cash Isas also offer parents better returns than other savings vehicles with the benefit of higher interest – all of which is tax free.

However, with the market leading cash Jisa deal paying 2.5 per cent, there are those who will argue that your money will be better served invested in stocks and shares.

The average monthly payment into a Jisa is £87 a month, according to Hargreaves Lansdown.

If you kept up the payments for ten years, and your investments returned long-term growth of 5 per cent a year, you could build up £13,510. 

If you kept it up for the full 18 years, you’d have £30,381 by the end.

But some investments over the long term can achieve even greater returns than this.

According to investing platform Interactive Investor, the top three most held stocks in Jisas over £50,000 are Scottish Mortgage Investment Trust, Fundsmith Equity and F&C Investment Trust.

Someone who invested in Scottish Mortgage Investment Trust exactly five years ago would have seen a return of almost 400 per cent ignoring platform charges, management charges and dividend payments.

Those who invested in Fundsmith Equity or F&C Investment Trust five years ago would have seen 124 per cent and 80 per cent growth respectively.

An investment of £25 a month in F&C Investment Trust over the past 18 years would have grown to £17,646,

If the same had been done via the average easy-access savings account, based on Moneyfacts data over the past 18 years, the final return would have been £5,854 – more than three times less. 

The power of compounding

Those trying to weigh up between saving or investing in a Jisa will likely consider the past performance of various funds or investment trusts – albeit understanding that past performance is no guarantee for the future. 

Financial planners and investing experts often use 5 per cent as the type of annual return you can expert over the long term – to some this may not be tempting enough to take the risk.

But an element of investing that perhaps isn’t mentioned enough is the power of compounding that investors and even savers can benefit from, especially over the long-term when investing for children.

The interest, dividends or capital growth you make on what you put in a savings or investing account will snowball overtime and as it grows you are essentially earning return in every gain you make.

In a simple example, if you invest £1,000 in a Jisa and receive an average of 5 per cent growth a year over 18 years.

You might think you’d make £50 a year, so after 18 years it would grow by a total of £900, but you also need to factor in the growth on your growth.

After a year, instead of growing £50, you’ll have made £51.27 and after two years instead of growing a total of £100 you’ll have made £105.16.

The longer you leave it for, the bigger the impact of compounding, so that after 18 years instead of having grown by a total of £900, it would have risen by £1,459.45.

The downside of a Jisa

One factor parents should be aware of before saving or investing in a Junior Isa is that once a child turns 18, it becomes their money to do what they like with.

While you might hope all your hard-earned savings might go towards something sensible such as a deposit for a property or on tuition fees, you ultimately won’t have the final say on how the money is spent.

Handing over control of the carefully saved pot of money is a cause for concern for many parents, according to F&C Investment Trust.

In fact it found that a third of parents feel anxious at the thought of their child having full access to their Jisa on their 18th birthday.

This anxiety stems from doubts over how sensible their children will be with the money, with almost half of parents concerned their children will spend the money on frivolous things.

The research found that almost half of parents hope the money will be put towards a property deposit, but less than a quarter of teenagers plan to use the money to achieve this goal.

But it was also found that once granted access seven in ten 18 year olds opt to put the money into an adult investment account or cash savings account rather than spending it.

Beatrice Hollond, chairman of F&C Investment Trust said: ‘Our research shows that some parents are nervous about handing the reins over to their children when it comes to the savings they have built on their behalf, with expectations that money may be spent on frivolous items and not be put to long-term goals.

‘Teenagers across the UK are in fact countering expectations and planning the opposite, with the vast majority of Junior Isa savings going straight into adult savings and investment accounts.’

And this is not just the case with F&C Investment Trust either.

According to Hargreaves Lansdown 94 per cent of its Jisa clients still have their money invested a year after they have turned 18.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown said: ‘It can help to talk to the child about their Jisa as they go along, so they have an idea of how it is invested and how it is growing.

‘This will give them more of a sense of responsibility and ownership than just getting the opportunity to receive a lump sum at 18.’ 

How easy is it to set up a Junior Isa?

Not long ago, investing typically required a stockbroker or financial adviser and the willingness to hand over a big chunk of commission.

Now armed with a computer – or just a smartphone – investors can use a DIY investing platform or online broker and the wealth of research at their fingertips to hopefully build a fortune for their child.

DIY investing platforms act as a place to buy, sell and hold all your investments and to have a tax-efficient wrapper around them if you choose to invest in an Isa.

When weighing up the right one for you, it’s important to look at the service that it offers including whether it includes Junior Isas, along with administration charges and dealing fees, plus any other extra costs.

We have written an extensive guide on the best and cheapest DIY investing platforms, which might help you decide.

What should you invest in?

Once you have chosen which platform or provider to invest through, the next daunting task is to choose what to invest in.

Many of the investing platforms allow you to invest in a large range of funds, investment trusts and if you’re feeling particularly daring, individual stocks and shares – although the range of choice varies between providers.  

If you would prefer to leave your money in the hands of fund managers then this certainly has its benefits as well as removing some of the stress and research involved when picking individual stocks.

But there still remains a question of how many funds or investment trusts it is sensible to invest in?  

Laura Suter, head of personal finance at AJ Bell said: ‘What you invest in depends on how old the child is and how much risk you want to take, as well as how much money has accumulated in the account. 

‘If there’s only a small sum of money in the account you could be better sticking to one fund that’s well diversified, rather than spending a lot on fees buying lots of different funds. 

‘You could use a cheap global tracker fund, like Fidelity Index World, which tracks the MSCI World index giving exposure to lots of companies around the world at a low cost of just 0.12 per cent.

‘If there’s more money in the pot you could use these funds as your base and then add to them, depending on what kind of investments you want to make. 

‘For example, you could opt for a higher risk investment in emerging markets, if you have a long time until your child turns 18, or you could add in a UK-specific fund to get more access to UK markets.’  

For those who would rather not have to make any decisions themselves, there are even options that mean you won’t have to make a choice.

Online investment management services like Nutmeg and Wealthify will invest on your behalf in accordance with your personal risk profile.

You can control a Junior Isa all from an app on your phone and change your risk profile as and when your circumstances require.