Junior Isas: Are parents being too cautious when it comes to saving for their children?

15th September 2014

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Parents could be denying their children a more prosperous future warns accountancy group UHY Hacker Young, as just a quarter of the money saved in junior Isas is invested in shares

The ultra-cautious approach means that of the total £578m invested in Junior Isas in 2013/14, just £147m was subscribed to shares, with the remainder allocated to cash.

However adults took a slightly more bullish approach to their own savings, allocating almost a third, at 32%, of their Isas to shares last year – some £18.4bn of a total Isa pot of £57.3bn.

Junior Isas, which essentially replaced Child Trust Funds (CTFs), are tax-efficient savings vehicles aimed at encouraging families to squirrel away cash for their children’s futures. With a Junior Isa, families can save up to £4,000 every tax year and all gains and interest are free from the clutches of HMRC.

UHY Hacker Young says that since junior Isas are generally used as long term savings vehicles for children, a higher weighting of shares – though potentially riskier in the short-term – could be a better strategy as it is more likely to deliver greater returns over a longer period.

It warns that too high a proportion of cash could actually turn out to be recklessly cautious. While stockmarkets can be volatile, those who had invested a lump sum in the FTSE 100 index of the UK’s top firms over the past five years would now be sitting on a gain of 62% – leaving cash returns over the same period in the dust.

Mark Giddens, partner at the firm said: “Parents tend to be particularly risk-averse when investing for their children – more so than they are for themselves – especially if funds come from an inheritance or a gift from relatives. They don’t want to chance a drop in value.”

“Having a higher allocation of savings in cash might seem like the safest option, but even a cautious approach can carry risks. Cash is not always king.”

“While a high proportion of cash may be a sensible bet for older teenagers who want to access the funds when they reach 18, with interest rates at record lows, it’s less likely to pay off for many children, who could see the value of their savings eaten away over the years by inflation.”

Bank of England figures show that average UK lenders’ interest rates on ISA products were just 1.18% in July, while the rate of inflation for the year to July stood at 1.6%.

Giddens added: “After the shocks of the financial crisis, it’s perhaps not surprising that parents are erring on the side of what they see as caution. The well-known caveat that investments could go down as well as up has been brutally reinforced.”

Last December the Government announced that people who took out a Child Trust Fund (CTF) for their child will be able to move it to a Junior ISA from April next year 2015.

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