Whether it is spending hours helping with homework or providing a taxi service for after-school clubs, most of us want to help our children get off to a good start in life.
But what about providing a sound financial foundation? You might have already set up a junior savings account. Most banks and building societies provide them, often with relatively attractive interest rates and extras designed to make saving fun. Providers see the generosity as an investment designed to bring in customers for life.
A young person’s saving account also provides a lasting solution for Christmas and birthday presents for years to come. But does it make any financial sense?
The problem with savings accounts
Savings accounts are certainly more sophisticated and more appealing to savvy young savers than the even more traditional young peoples’ financial solution, the piggy bank. But the fact is, even with preferential rates they are still not actually that much more rewarding than the china stalwart.
The Bank of England is putting up interest rates, which means high street savings providers will be able to hike the rates they offer in the near future – but they are unlikely to compare with the loss of purchase power caused by inflation.
Inflation is running at around 7% at present and some pundits suggest it could reach double figures. Money in any savings account – not just junior accounts – is actually falling in real value faster than it can grow.
The sad fact is that with a savings account, it could be seen that currently you are not building wealth for your children’s future, but potentially you are throwing it away.
Cash savings can provide cash for a rainy day, and at Continuum we recommend instant access accounts as a part of a financial safety net for adults. But they are very little help in building wealth for the future, for adults or for children.
What about Junior Cash ISAs?
Of course, a savings account is not the only answer.
Junior ISAs were created as part of the ISA family to make saving more worthwhile by protecting everything put into them from the taxman. Junior ISAs are available for children under the age of 18, and in 2020 the Government more than doubled the annual allowance for contributions from £4,368 to £9,000. Parents can therefore now invest up to £162,000 in total before their children reach adulthood (if they save from birth to the child’s 18th birthday), which with interest should provide a very worthwhile start for life, whether it is paying for education or as the deposit on a first home.
But even the most rewarding Junior Cash ISA can currently only offer 2.4% interest, only marginally better than a savings account.
They remain popular. There were 706,000 Junior Cash ISAs in the 2019-20 tax year, according to HMRC. They are simple for parents to set up, and they keep the nest egg you want to build for your children secure.
But they are simply a savings product, and in the current inflationary times, they cannot really be said to build wealth. Rising prices eat away the real value of cash you put in faster than the interest it earns can grow it.
The solution could be a Junior Stocks and Shares ISA
A Junior Cash ISA is a savings product. The money placed in it remains as cash. A Junior Stocks and Shares ISA, on the other hand, is an investment. The money you contribute does not remain as cash – instead it is invested on the stock market, buying stocks and shares
In practice, risks will aim to be mitigated by careful investment of client’s money by professional investment managers who may invest into blue chip companies, and sometimes a broad diversity of different asset classes.
Like any other investment, there will be risk. There is no guaranteed rate of return, as with savings. The value of equity investments can fall as well as rise – but if you can invest in the stock market for the long term, which means more than five years, potential for real growth is there.
Investing has the potential to beat inflation and deliver real returns, creating wealth rather than watching it decline over time.
Investing in a Junior ISA can be as simple as paying into a savings account.
To find out more about investing for your Children’s future, get some expert advice from the Continuum team. We can help you find the Junior Stocks and Shares ISA that is right for you and for them – as well as other ways to get them off to a sound financial start.
The value of an investment can go down as well as up, Capital is at risk.
Equity investments do not afford the same capital security as deposit accounts.
The levels, basis and reliefs from taxation may be subject to future change
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.