Parents wanting to save for their children’s future should opt for a stocks and shares junior ISA (JISA) rather than a cash alternative, according to Moneyfarm data.
Assuming a full £9,000 invested at the beginning of each tax year for the next five years (£45,000 in total), the firm estimated that at the end of the fifth year the account would hold £45,284 – an annualised return of 0.13% or 0.63% in total.
However, with inflation currently at record highs, this would mean these pots are much worse off. Indeed, using the forecast from the International Monetary Fund (IMF), the pot would be worth £42,636 at today’s prices.
When using the Bank of England (BoE) inflation forecast – which looks over three years – and using the IMF forecast for the final two years, this could drop to £42,165.
“Historical analysis also shows the weaknesses of a cash ISA, showing that cash investments haven’t successfully hedged savings from the impact of inflation over the past 10 years,” the report said.
“Clients investing £9,000 in a cash ISA in 2012 would have lost around 10% in real terms. With the BoE raising rates, it is important to keep in mind that real rates and returns are still deeply negative in the UK.”
Source: Moneyfarm
According to the report, 57% of UK adults believe they are not investing as tax-efficiently as possible, rising to 63% among those on lower incomes, making it crucial to maximise tax-free savings.
In the tax year 2019/2020 around 1 million junior ISAs were topped up, with £971m sat in these accounts in total. However, 61% was held in cash.
To keep up with inflation, however, parents should look to move into stocks and shares ISAs to make a meaningful return for the future.
Chris Rudden, investment consultant at Moneyfarm, said: "A junior ISA is the perfect way to give your child a head start in life whilst ensuring returns are protected from rising inflation levels, as well as from capital gains and income tax. And, if you can start early, the power of compounding and good time in the market can really boost those returns. “
Moneyfarm also announced the launch of its junior ISA range, which is to be managed in the same way as the Moneyfarm ISA portfolios, which range from Portfolio 1 to Portfolio 7, moving up the risk scale the higher the number.
Since its launch in 2016, Portfolio 4 – for balanced investors – has returned 47%, compared with a 38.3% average return from a basket of competitors.
The JISA portfolios will have a tiered management fee of between 0.35% and 0.75% and there will be a socially responsible investing option for investors that wish to use their money for good as well as for higher returns.