Junior ISA account openings rose at a remarkable rate of 46% in the last tax year. Since they were introduced in November 2011, Junior ISAs have proved popular and this figure is only going to rise, particularly from this month, when the six million families trapped in “zombie” Child Trust Funds on poor rates are able to switch their money to Junior ISAs, which offer much better returns on your money.
This tax year parents can invest up to £4,080 in a Junior ISA, although many will probably prefer to save relatively small amounts each month. But over an 18-year time frame setting aside as little as £50 a month can build up to a substantial pot of money.
However, the majority of parents will not enjoy such growth. Three quarters of the Junior ISA accounts opened over the past year, a total of just over 100,000, have been invested in cash in preference to stocks and shares.
Understandably not everyone feels comfortable putting their savings at the mercy of the stock market, but when it comes to investing for your children, the time frame is so long that it makes no sense to look for sanctuary in cash. An 18-year period gives parents adequate time to ride out the peaks and troughs of stock markets and the odds of not outperforming cash are extremely low.
Few people would put their pension savings entirely in cash, and with an investment horizon of up to 18 years for a Junior ISA, children’s savings should be viewed in the same way. Over the past two decades British shares have on average delivered 7% a year. By saving £132.50 per month from birth, it is possible to achieve a pot of just over £46,000, based on 5% growth per annum.
While stock markets can fall in value, there is also a risk in investing in cash: inflation.
The majority of cash Junior ISAs pay interest of between 2% and 3%.Whilst this is much better than the rates offered to adults, with inflation running at around 2.5% picking the right stocks and shares Junior ISA could give your child’s savings a real boost.
David Dawson, Savings Director at The Children’s ISA said: “Record-low interest rates and above-target inflation means cash savings will lose real purchasing power over time. By opting for the supposedly “safer” option of cash as a long-term investment, one outcome is almost certain – any gains will be heavily eroded by inflation over time. Over 18 years, the riskiest asset class you can have your money in is cash, as it is categorically guaranteed to fall in value.”
The Children’s ISA has a range of investment options based on your attitude to risk and the length of time the money will be invested and can be opened from as little as £10, either as a lump sum or a monthly contribution.
For more details visit www.thechildrensisa.com or register your interest on this site to keep up to date with all the latest information about transferring your Child trust fund.