It has been seven years since the launch of Junior ISAs – the tax-efficient savings plan to help parents and guardians build up a long-term savings pot for their children. For me, it’s been just under three years since I started investing for my now four-year-old daughter, Audrey.
I never predicted that becoming a parent would be the catalyst that caused me to invest in the stock market for the first time.
Given my career as a financial journalist, you would think that I’d have been an experienced investor – but at that time, other than contributing to my workplace pension, I never seemed to have money that I wanted to lock away for a long term. Like most thirty-somethings, there was always a more immediate savings goal, whether it was a house deposit, our wedding or property renovations.
But when I became a parent, my outlook on the future changed. I knew that the money I would be saving each month for my daughter wouldn't be spent until she was a minimum of 18 years of age and that time is a powerful ally of the investor.
What’s more, thanks to pitiful cash-savings rates and the corrosive effects of inflation, any nest egg we created could hardly be expected to grow at all if it was kept in cash.
So, I opened a Junior ISA (JISA) with Hargreaves Lansdown and opted to invest monthly on Audrey's behalf via a standing order. The money goes into two funds; Artemis Global Income and Old Mutual UK Smaller Companies due to their exposure to long-term growth assets and proven track record over a market cycle. I liked the fact that the Artemis fund paid an income which I chose to automatically accumulate, buying more units and harnessing the power of compound interest.
A quick look at my online account and I’m happy to report that Audrey’s portfolio is up 30%.
What are JISAs?
As with adult ISAs, Junior ISAs offer a tax-free wrapper within which investments can be held. The allowance is £4,128 this tax year, and £4,260 for 2018/19.
A Junior ISA can be opened and managed by a parent or guardian, but there are no limits on who can contribute to them – friends and relatives can boost these long-term savings with gifts at Christmas and birthdays.
The account can be managed by the child when they turn 16, with the money locked away until they are 18.
Bear in mind that with a Junior ISA of any type, once cash is invested, it belongs to the child: which means that you can't get it back it, no matter how much your need the money. You can, however, switch between cash and stocks and shares at any time.
What’s more, when your offspring turn 18, you will have no say how the funds set aside are spent. While you might want it to go towards university fees, your child could well have other ideas.
The good news is that research from Hargreaves Lansdown found that a year after a JISA becomes the property of an 18-year-old, more than 90% of JISAs remain invested.
Majority of Parents Save for Kids in Cash
So much of parenting is risk management, so it is hardly surprising that 61% of parents have opted for what seems like the safest option for their JISA: cash.
But while investing for your children seems the obvious course of action to me, official data shows that women are three times more likely to open a cash Junior ISA than put the money in stocks and shares. It seems most mums are worried about what they see as gambling with their children’s savings.
This is a lost opportunity as research shows that women are great investors: analysis of Hargreaves Lansdown clients reveals that in the three years from August 2014 to August 2017, female investors outperformed men by an average of 0.81%. Which may not seem like much of a margin, but if that performance was replicated over 30 years those female investors would end up a 25% bigger portfolio than their male counterparts.
Why Investing is Right for Me
Yes, one can lose money on the markets and as every disclaimer points out, share prices can go down as well as up and past performance is no guarantee of future returns.
But I’m comforted by the fact that, over the long term, you are less likely to lose money in the stock market than keeping your savings in cash. The probability that shares will outperform cash savings is 75% over five years, increasing to 90% over 10 years and 99% over 18 years, according to an authoritative study by Barclays that uses data going back to 1899.
However, one thing that is certain is that thanks to inflation, had I opted for a cash JISA which according to Moneyfacts.co.uk, offers an average rate of 2.34%, the balance would have shrunk in real terms. Over time, this would deal a devastating blow to the overall amount.
Figures from Investec show that parents who put £5,000 in a lump sum into a child’s cash savings cash account between January 2004 and December 2016 would have ended up with £6,571. However, they would have lost their child purchasing power by 2.3%. In other words, their £5,000 was worth £4,885, when adjusted for inflation.
