It’s been four years since the launch of Junior ISAs (JISAs), the tax-efficient plan to help parents and guardians build up a long-term savings pot for their children. Savers can put up to £4,080 annually in a Junior ISA and invest in any combination of equity funds, bond funds and cash, but these accounts have failed to meet their full potential thanks to low interest rates.
Cash a Terrible Way to Save
“Cash JISAs are a simply terrible place to park wealth for the long term as the real value of the capital will be eroded over time by the corrosive impact of inflation, which is the silent assassin of wealth,” says Jason Hollands, managing director at Tinley BestInvest.
What’s more, interest rates on these cash accounts are continuing to fall. Furness Building Society, for instance, once offered a best buy rate of 3.05%. This has been cut repeatedly over the last couple of years and the rate now stands at 2.10%, while Halifax dropped the rate on its Junior Cash ISA (linked to an adult ISA) from 6% to 4%. Skipton Buidling Society, which also once offered a competitive rate of 3.02%, chopped its rate to 2.65%, sending it falling off the best-buy tables.
“Changes to rates in this sector have been rare in the past, so it’s disappointing to see that some of the main bank brands that dominate this market are now choosing to reduce the rates they pay,” says Rachel Springall, finance expert at Moneyfacts.co.uk. “Other providers could also follow suit; most rates in this sector are variable, so they could change at any time.”
To further add insult to injury, many financial experts argue that cash-based Junior ISAs have become redundant due to the fact that children are unlikely to be subject to income tax on any interest anyway and if they do, simply completing an R85 form when opening a savings account overcomes this issue. Add to this the announcement in the Budget that from April 2016, the first £1,000 of interest on any savings account would be tax-free for non-higher rate taxpayers anyway and some parents are asking if JISAs are worth it.
Invest Early and Regularly for Children
“Start saving for children as soon as possible,” says Patrick Connolly, certified financial planner at advisers Chase de Vere. “Even modest regular payments made into a stocks and shares JISA rather than a cash account can turn into a significant sum for children if they’re invested over an 18-year period,” he adds.
But figures from HMRC suggest that parents are reluctant to put their offpring’s money into equities, with 70% opting for cash, and not shares. This caution about investing in the stock market could prove a costly mistake thanks to the greater length of time invested, meaning short-term falls in share prices have time to even out.
“A lot of people instantly consider ‘risk’ to be a bad thing but in fact in the ‘physics of investing’ there is a fundamental relationship between risk and reward and it is therefore important to take a level of risk that is appropriate for your time horizon,” said BestInvest’s Hollands.
JISA Investment Picks
For those willing to take a very long-term approach, perhaps investing as soon as your child is born, Hollands tips Scottish Mortgage Investment Trust (SMT), rated Gold by Morningstar analysts who describe it as one of their favourites for global equity exposure.
For those who would prefer a more ‘hands-off’ approach, an alternative is to invest through a passive or index fund that simply tracks the general movements in markets, rather than pick an investment with the potential to do much better—or worse—depending on the skills and success of the team.
Here, Hollands suggests holding a couple of trackers with the majority of the investment tracking a developed market equity index such as the FTSE World and a smaller allocation to track an emerging market index. Examples are the Vanguard FTSE Developed World ex UK Equity Index fund, also rated Gold by Morningstar, and the Fidelity Index Emerging Markets P fund.
Bear in mind that cost is the major factor to consider when choosing one of these ‘invest and forget’ funds.
For parents with young teenagers, there’s a strong case for selecting a lower volatility investment approach, rather than equity funds, but one that nevertheless aims to stay well ahead of the meagre returns on cash.
“In the past, bond markets would be the natural home to find such an investment but bond markets are quite expensive at the moment and prices could fall once interest rates rise,” Hollands reminds us.
As an alternative, he suggests that parents might look instead at absolute return funds—those which pursue diversified investment strategies with the aim of delivering a little bit of return often, with low volatility, such as Invesco Perpetual Global Targeted Return fund. Morningstar’s Manager Research team hasn’t awarded a Gold, or even a Silver, rating to any absolute return funds. The two that have earned a medal rating are Newton Real Return and Standard Life Investments Global Absolute Return Strategies, both rated by Bronze by Morningstar analysts.
