New research shows that parents who save or invest in their child’s future through a Junior ISA rather than Premium Bonds are likely to leave their child better off.
According to Quilter’s analysis, those who invested in Junior Isa stocks and shares could expect to leave their children two to three times more, according to wealth management firm Quilter.
Its calculations suggest that if £3,600 was put into a stocks and shares Junior Isa when it was first made available in 2011, it would currently be worth nearly £10,000.
Three-fifths of the £1 billion put into to Junior Isas in 2019/20 sit in cash accounts.
This is compared to just £4,000 had the money been invested in Premium Bonds during the same period.
Premium Bonds have risen in popularity during the pandemic with the number of eligible £1 bonds rising from 86billion to 113billion since March last year.
The minimum investment amount is £25 and rule changes in 2019 mean aunts, uncles, godparents and even family friends can gift Premium Bonds, making them a popular present.
It is important to remember that the Bonds will be managed by the guardian or parent you have nominated.
The odds of each £1 Bond winning a prize is currently fixed at 34,500 to 1 with the prize fund rate currently at 1 per cent.
According to numbers crunched by data scientist Andrew Zelin, savers who invest £1,000 into Premium Bonds will have to wait almost 3,500 years for a 50:50 chance of winning the amount they put in.
Quilter’s analysis shows that Premium Bonds would be a better investment than saving for the future of a child based on past performance.
The maximum Jisa limit in 2011 was £3,600 and calculations show that if the full amount was put into a stocks and shares Jisa and invested in the IA UK All Company index it would be worth £6,918 today.
If it had been invested in the IA Global index it would be worth £9,580 today assuming fees of 0.5 per cent.
But if the same amount was invested in Premium Bonds over the same period, it would be typically worth £4,025, using historical prize fund rates which give an average return of 1.25 per cent.
Abigail Banks is a financial planner at The Private Office. She said that, given the timeframe for accessing the money within a Junior Isa, which could be 18+ years, it makes sense to consider investing the funds to maximize the potential returns above those available from cash.
“Of course, the value an investment can fluctuate but given the timeframe, even though it falls in the short-term, it should have enough time to recover before it is required again.”
‘If you were to contribute £50 into a Jisa account when your child is born, and each month afterwards for 18 years, with the funds generating a growth rate of 5 per cent per annum, the estimated future value of your investment would be over £17,300.
‘If you were to contribute the maximum of £9,000 each year for 18 years, at a growth rate of 5 per cent, the estimated future value of the investment could be around £266,000.’
It is worth noting that the money in a Junior Isa belongs exclusively to the child. The money becomes theirs when they turn 18 years old.
The popularity of Junior Isas has also increased during the pandemic. Account subscriptions recently surpassed one million for the first time since 2011 when the accounts were launched.
Three-fifths of the £1billion put into Jisas during the last tax year sit in cash accounts.
However, the analysis shows that even if it is in cash, it will often be more lucrative for your child in their future than Premium Ponds.
A Premium Bonds saver can expect a return of 1%, while the best cash Jisa currently pays 2.5%.
Anna Bowes, co-founder of Savings Champion said: ‘Although you might be really lucky and earn a lot more than the interest you could earn in the Jisa, an investment into Premium Bonds – especially a small amount – may never win any prizes.
‘If you were to deposit £50 a month from birth into a Jisa, assuming an interest rate of 2.5 per cent, which is currently the highest cash Jisa rate, at 18 your child could have over £13,600.
‘If you and your friends and family could stretch to £9,000 a year (the current maximum that can be deposited per annum) the amount could be a staggering £206,000 – that’s a huge responsibility but could transform your child’s financial future.’
Should you choose to invest in stocks and shares Jisa or cash?
Cash is preferred for both Junior and Adult Isas. Quilter reports that over two-thirds (or more) of such accounts are cash-only.
Junior cash Isas provide parents with better returns than other savings options, and also offer higher interest that is all tax-free.
But with UK inflation, currently at 3.2 per cent and expected to rise to 4 per cent or more in the coming months, even those with the market leading 2.5 per cent cash Jisa deals could temporarily see the value of their savings fall in real terms.
The risk-management approach of the individual will determine whether they choose a cash Jisa or stock and shares Jisa.
Any decision will be influenced by the time that a parent or guardian plans to save or invest.
A parent who wants to start when their child is 2 or 3 years old might choose a different path than a parent who wants to save money for their teenager.
James Blower, the founder of Savings Guru, said that if your time horizon is more than 10 years, you should almost definitely go for stocks and shares Isa. This is because stocks have outperformed cash over a five-year period and almost all times, in excess of 10 years.
“But if you’re looking at less than five year, then definitely consider cash Jisas.”
Some people may choose to save their children’s money in their own Isa wrapper. Read more: Should you open an Investment Junior Isa instead of a cash one? Or just use your tax-free allowance.