Parents saving for their children in cash Junior Isas have missed out on up to £13.5billion in potential returns over the past decade, new research suggests.
Those who favoured the ‘stocks and shares’ version of the popular tax-free savings account over the cash option would have earned up to £32,300 each more since they were launched in 2011.
That’s according to a new study by Scottish Friendly and the Centre for Economics and Business Research, which compared the performance of the two types of Jisas.
Saving for a child’s future: Junior cash Isa holders have missed out on £32,300 each since 2011
Cash Jisa holders who maxed out their annual Isa allowance every year since 2011 would have built up a pot worth £52,200 after depositing a total of £44,800, based on total estimated returns of 16.4 per cent.
But had they maxed their Jisa allowance with investments into the MSCI World Index via a stocks and shares Jisa, they would have made a total of £84,500, or £32,300 more.
That’s based on total estimated returns of 88.4 per cent and assuming fees of 0.45 per cent, Cebr said.
Since 2011, the MSCI World Index, a global equity tracker, has returned on average 6.5 per cent a year when you take fees into account, according to the report.
That is more than four times the 1.53 per cent average annual return of cash junior Isas over the same 10-year period.
Although cash Jisa rates have been higher than adult cash Isas over the last decade, rates across the board have remained low ever since the financial crisis in 2007.
Cash Jisas are offered by banks and building societies though accounts that pay an interest rate that can be fixed or variable.
The investment option known as a ‘stocks and shares’ Junior Isa is offered by insurers, investment managers and online wealth managers. They come with fees and no guarantees on returns.
Despite the potential for higher returns on the stock market, cash Jisas remain a far more popular option among parents.
The number of account holders with a cash Jisa has increased every year since they were first introduced, reaching 706,000 in 2019-2020.
By comparison, the number of stocks and shares Jisa holders in the same year was just 317,000, according to the report.
What stops parents from investing in a stocks and shares Junior Isa?
Perhaps unsurprisingly, adults on higher incomes are more likely to invest into junior stocks and shares Isas than those on middle and lower incomes.
A survey of 500 junior Isa account holders carried out on behalf of Scottish Friendly found that 73 per cent held a cash Jisa only.
More than four in ten people earning over £50,000 have a stocks and shares Jisa compared to just 17 per cent of those with an annual salary of less than £50,000.
The most common reason people gave for opening a cash Jisa over a stocks and shares version was because they felt it was easier to manage, with nearly a third saying so.
Meanwhile, more than a quarter said it was because their money was more secure, and a similar proportion felt it was easier to set up than an investment junior Isa.
When respondents were asked specifically why they didn’t invest in stocks and shares Jisas, the main reason given was because the charges are too high or because they were concerned about losing money.
In contrast, for those with investment Jisas, the main reasons for choosing it over a cash account were based on returns.
Over a quarter said it was because they expected higher returns, while a similar proportion said it was to leverage the growth potential of the stock market, with more than one in five saying it was to protect against the threat of rising inflation.
Jill Mackay, head of marketing at Scottish Friendly, said: ‘For many parents saving for their children’s future is a major priority and giving them a helping hand as they start out in adult life is a big responsibility.
‘Everyone wants the best for their child when it comes to building a nest egg so it’s understandable that many of us are tempted by a more cautious approach.
‘However, if you’re putting money away for a child for up to 18 years, then it could make sense to consider investing as historically stocks and shares have proven to perform better than cash over the long term, albeit this is not guaranteed.
‘Plus, investing isn’t just for the wealthy and well advised, it’s possible to invest from as little as £10 month. By investing even small amounts you could ultimately build a brighter start for your child.’