Almost three-quarters of parents choose to invest their child’s savings in cash. But are they playing it too safe? With Bank of England interest rates staying at 0.5% parents could be risking long-term underperformance by choosing cash products rather than a stocks and shares ISA.
Figures show that 365,000 out of a total of 510,000 Junior ISAs (JISAs) opened in 2014/15 (72%) were cash ISAs, compared to just 145,000 stocks and shares products. This is an increase in the number of cash JISAs on the previous two years, in 2012/13, when the proportion was 69%.1
Compared to equities, cash substantially underperforms in the medium and long term. Research shows that in the 10 years to 2014, cash values fell 0.7% whilst the value of equities rose 4.1%.2
Parents are rightly keen to build a nest-egg for their children’s future but they need to make their money work harder by considering shares rather than cash. The above figures suggest that equity investments are more likely to pay off over the long term compared to cash deposits, children may thank their parents for balancing the risk and reward in their long-term savings.
Of course, the stock market can go up and down; but there is a growing danger with cash that the real value of savings could actually diminish over the years, when you take inflation into account.
Sometimes there can be too much focus on short-term hits to the stock market, whereas reasonable growth over a long period does not make for an exciting headline.
Cash ISAs may be better suited to teenagers approaching adulthood who may need to access their savings sooner. However, parents of younger children should carefully weigh up the perceived risks of the stocks and shares against the potential for capital erosion in leaving savings in cash for years – as well as what the rewards might be.
Parents are often understandably risk-averse when it comes to saving for their children – particularly if they’ve been given some capital by relatives which they want to keep for the future. With spiralling property prices and expensive university fees ahead, parents are relying on ISAs to give their children a financial leg-up when they grow up but investment in cash significantly limits any growth in savings.
1 Junior ISAs opened in 2014/15 tax year.
2 Research from Barclays Equity Gilt Study.