Is your five year old struggling to reach their full potential?

Junior ISAs turn five yet many are stunting their growth

The first of November marks the fifth anniversary of the launch of the Junior ISA - a tax efficient plan to help parents and guardians build up a long term savings pot for their children which could be used for purposes such as funding a degree course, a deposit on a property or first car. However five years on most accounts are not reaching their full potential, as data released by HMRC suggests 67%* of all Junior ISA (JISA) accounts are held in Cash, with only 33% in investments despite record low interest rates over this period on the one hand and conversely buoyant stock markets over this time on the other.

Jason Hollands, Managing Director of Tilney Bestinvest, comments:

“The Junior ISA was developed as a long term savings scheme and the proceeds cannot be accessed until a child is 18 years old, so in the vast majority of cases cash is not an appropriate asset to hold other than potentially for those children in their teens who are just a couple of years away from needing to access their cash. But even in these circumstances, a Junior ISA isn’t likely to be the best option – why hold cash in an account which cannot be accessed when a child can earn tax free interest in a regular savings account?

“Firstly, most children have no earnings so are unlikely to be subject to income tax on any interest and can receive it tax-free on a regular savings account if their parents completed an R85 form. But also from this tax year the first £1,000 of interest on any savings account will be tax free for non-higher rate taxpayers anyway.

“The preference for cash in Junior ISAs is quite ironic given that the Child Trust Fund which the JISA replaced, though much criticised for its lack of flexibility and choice, did at least see around three quarters of accounts invested in the markets as a result of Stakeholder funds being positioned as the default option. Most of the latter were tracker funds, levying quite high fees of 1% – but despite this, returns on these will still have been much higher than cash over the last five years. It just shows you that greater choice and flexibility don’t always lead to the best outcomes, as many parents and guardians perhaps lack the confidence to choose investments over cash.

“While we all need some cash for short term needs, cash is a terrible place to park wealth for the long term as the real value of the capital will be eroded over time by inflation and inflation is starting to rear its head again after a period where it has been incredibly low. As a JISA can only be accessed at age 18, for young children these really are long-term investments and that means you might be prepared to accept greater risk for the potential of greater reward. For younger children that means investing in equities.

“Finally, it is worth pointing out that while Junior ISAs are great for parents building up a pot of wealth to give their children a helping hand in adult life, the fact they cannot be touched until the child is 18 means they are not the right choice if saving for school fees, or incidental school costs such as trips. Some parents are also reticent about their children getting full control of a large sum of money at 18 when they may lack financial maturity. Therefore, parents should consider using their own – now sizeable - ISA allowances instead and use the funds to settle specific costs (such as college fees) as they arise or gift money to their children when they feel it is appropriate. JISAs are a potentially useful allowance but not the only option for saving for children.”

*https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/547218/Table_9.4_Published_August_2016.pdf

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