This week marks the 10 year anniversary of the Junior ISA, which may lead some parents to reflect on whether the tax free savings account has led to some meaningful returns. Three fifths of junior ISAs are held in cash, according to research by F&C Investment Trust.
However, it appears returns regret has bitten some parents - upon realising the financial returns missed by saving, a third of those parents say they wished they had invested the money instead. Among Interactive Investor account holders, of those who invested in stocks and shares JISAs there are 110 with a value of more than £100,000 and a further 1,078 with between £50,000 and £100,000. Junior ISAs can be opened for any child living in the UK under the age of 18 and parents can contribute up to £9,000 each tax year. Parents can either opt to use the tax-free wrapper to either save or invest towards their child's future. When savings in a cash JISA all interest earned will be shielded from tax, while those who invest in a stocks and shares JISA will be shielding any dividends or capital gains from the taxman.
Almost half of parents favour the cash JISA because they think it is a safer option than investing, according to F&C Investment Trust. Junior cash ISAs also offer parents better returns than other savings vehicles with the benefit of higher interest -all of which is tax free. However, with the market leading cash JISA deal paying 2.5%, there are those who will argue that your money will be better served invested in stocks and shares. The average monthly payment into a JISA is £87 a month, according to Hargreaves Lansdown. If you kept up the payments for ten years, and your investments returned long-term growth of 5% a year, you could build up £13,510. If you kept it up for the full 18 years, you'd have £30,381 by the end. But some investments over the long term can achieve even greater returns than this.
According to investing platform Interactive Investor, the top three most held stocks in JISAs over £50,000 are Scottish Mortgage Investment Trust, Fundsmith Equity and F&C Investment Trust. Someone who invested in Scottish Mortgage Investment Trust exactly five years ago would have seen a return of almost 400%ignoring platform charges, management charges and dividend payments. Those who invested in Fundsmith Equity or F&C Investment Trust five years ago would have seen 124% and 80% growth respectively. An investment of £25 a month in F&C Investment Trust over the past 18 years would have grown to £17,646, If the same had been done via the average easy-access savings account, based on Money facts data over the past 18 years, the final return would have been £5,854 - more than three times less.
Those trying to weigh up between saving or investing in a JISA will likely consider the past performance of various funds or investment trusts - albeit understanding that past performance is no guarantee for the future. Financial planners and investing experts often use 5% as the type of annual return you can expert over the long term - to some this may not be tempting enough to take the risk. But an element of investing that perhaps isn't mentioned enough is the power of compounding that investors and even savers can benefit from, especially over the long-term when investing for children. The interest, dividends or capital growth you make on what you put in a savings or investing account will snowball overtime and as it grows you are essentially earning return in every gain you make.
About the Author: Glen Callow
