How to make your children’s savings grow while they do

Young savers are losing out on thousands of pounds because of a failure to invest for their future, it is warned today.

Investment experts are calling on the regulator and the industry to act now to ensure children get the most out of their savings. The Financial Conduct Authority (FCA) already warns that pension savers should not leave their nest eggs sitting in poor paying cash accounts.

Yet millions of pounds is languishing in ordinary child savings accounts — most of which pay well below inflation and as little as 0.05 per cent.

Going to waste: Yet millions of pounds is languishing in ordinary child savings accounts — most of which pay well below inflation and as little as 0.05 per cent

Experts also say that, while the stock market has been hit badly by the virus crisis this year, history has shown it always bounces back.

Junior Isas (Jisas) were launched in 2011, and offer a valuable tax-free wrapper to families who want to build up a nest egg for youngsters.

The money can be put into stocks and shares or cash. It is then locked away until the child reaches 18 (though children can start managing their account on their own from 16) and any earnings will not be taxed.

Figures released last week by HMRC show that 70 per cent of parents are still choosing cash Jisas over the stock market.

Chancellor Rishi Sunak this year more than doubled the annual limit parents can pay into a Jisa from £4,368 to £9,000. 

It is hoped the move will encourage families to put more money aside for children who would benefit from a fund to help with university or a helping hand on to the property ladder.

But Scottish Friendly wants to see the industry and the FCA do more to encourage parents to invest, as figures show that families who do end up with a pot nearly a third larger than those who stick to cash. 

Super way to save for our son, 12 

Full allowance: Peter Williams and his wife Pilar with their  12-year-old son Oskar

Peter Williams and his wife Pilar have saved the full annual allowance into a Junior Isa each year for 12-year-old son Oskar.

The couple, who live near Stirling in Scotland, invest a lump sum every April at the very beginning of the tax year.

Peter, 68, says: ‘Junior Isas are a super way to save for children. We didn’t consider the cash version of the Isa for one moment. For the long term, the stock market is the place to be.’

Peter, who works part time as a non-executive director, decided to raise his investment for Oskar to match the new annual maximum of £9,000. ‘It was a good opportunity to take advantage of a bigger tax shelter,’ he says.

Peter and Pilar, who runs an online technology magazine, started saving for Oskar around eight years ago. The pot, intended to pay for university education or a house deposit, started life as a Child Trust Fund and Peter later transferred it to a Junior Isa.

Most of the money is invested in just one fund — Fundsmith Equity, run by Terry Smith. The Equity fund has turned £10,000 into £24,300 over five years.

Peter adds: ‘I explained to Oskar one day when he was eating tomato ketchup that I invest money in a company that makes it — Unilever — which pays me money in dividends when it’s doing well.’

Analysis by the mutual today reveals that mothers and fathers spend more than four times as much money on cakes and biscuits than they invest for their children.

The data from the Office for National Statistics shows that the UK’s eight million households with children spent a combined total of £1.6 billion on sugary treats in the 2017/18 financial year.

By comparison, Treasury figures from the same year show parents invested just £387.8 million into investment Junior Isas.

A survey for Scottish Friendly also shows that just 6 per cent of parents and grandparents saving for a child are using a stocks and shares Jisa — compared to 27 per cent who have a cash Jisa. 

Some 37 per cent use an ordinary savings account, and 26 per cent use a current account.

It comes as rates on cash savings have been in freefall. The average cash Junior Isa now pays just 2.06 per cent — down from 2.46 per cent last year.

A survey for Scottish Friendly shows that just 6 per cent of parents and grandparents saving for a child are using a stocks and shares Jisa — compared to 27 per cent who have a cash Jisa

Rates on ordinary child savings accounts have fallen even further after the Bank of England slashed the base rate to all-time low of 0.1 per cent.

Neil Lovatt, Scottish Friendly’s commercial director, says there should be more warnings for parents against leaving savings in a cash account for long periods of time.

He says: ‘What is most concerning is that people are continuing to choose cash over investments for their children’s long-term futures.

‘The FCA has already set out rules to warn those choosing cash as a long-term investment for adults, but there are no equivalent warnings on what I would describe as a looming market failure when it comes to savings for children. 

‘It is the sort of thing the regulator should be alive to and trying to point people in the right direction.’

Jisa cash rates currently range between 1 per cent and 3.25 per cent.

Sums from investment broker AJ Bell show that, assuming an average rate of 2.25 per cent, parents who saved £100 every month for 18 years would be left with a fund worth £26,862.

But parents who invested the same amount in a stocks and shares Jisa — and achieved an average annual return of 5 per cent after charges — would have a fund worth £35,447 instead — 32 per cent more.

Tom Selby, senior analyst at AJ Bell, says: ‘Given the FCA is clearly focused on nudging people away from cash in the retirement market, it would make sense for the regulator to turn its focus to the Junior Isa market as well.’ 

The first UK investor to make a million with Isas, Lord Lee of Trafford, is also backing the call.

He says: ‘UK Isas are probably the most attractive tax-free opportunity in the Western world and all the historical evidence shows that stocks and shares Isas beat cash Isas hands down, certainly over any reasonable length of time.’

b.wilkinson@dailymail.co.uk