Child savers lose out on £1.2bn in returns since Junior ISAs launch in 2011

Child savers holding cash have lost over £1.2bn in returns relative to those offered by investments since the introduction of Junior ISAs (JISAs) in 2011, new analysis by Quilter has revealed.

The wealth manager has called on the government to conduct a 10-year review of JISAs to consider why so few JISA accounts are invested compared with Child Trust Funds (CTFs).

Just under a third of JISAs are currently allocated to stocks and shares, compared with four-fifths of CTFs. Quilter’s analysis found that parents favoured stocks and shares CTF accounts over cash accounts because they received numerous nudges towards investments in the CTF literature, and all CTF providers were required to offer both a stocks and shares and cash account.

Quilter’s findings revealed that each year, parents and grandparents are contributing around £500m to their child or grandchild’s cash ISA. Assuming cash JISA returns of 2% since 2011, the wealth manager said the value of these accounts stands at £3.5bn. If instead the contributions were invested in a global index, however, the accounts would be valued at £4.7bn, to mean young savers have missed out on £1.2bn of value from excess cash savings.

Quilter financial planning expert, Heather Owen, commented: “Relatively few people choose to invest their savings in the stock market and instead favour current or easy access savings accounts, despite the historically poor returns on offer. Cash is favoured for both adult ISAs and Junior ISAs, with over two-thirds of such accounts being cash only products.

“While holding cash is no bad thing, favouring cash over investments is unlikely to build long-term financial prosperity as savers will miss out on the miracle that is compound growth, and inflation may simply erode the real value of their savings.

“Holding too much in cash is particularly unsuitable for children holding JISAs as the money will be locked away for up to 18 years, meaning any stock market volatility can be smoothed and the scope for compound growth is much greater.”

As part of a 10-year review, Quilter has proposed that the government consider the decision-making process of parents and grandparents when they open a JISA for their child. The wealth manager has also called for the government to consider the information given to parents by providers when they enquire about these products – to ensure that the risks of cash accounts are properly considered.

Owen continued: “As we approach the 10-year anniversary of JISAs in November this year, the government should consider why so many JISA accounts are allocated to cash, and whether we can learn an important lesson from CTFs by developing a stronger nudge framework to guide parents into opening investment accounts for their child.

“We have an opportunity to create a new generation of investors entering adult life with the best possible financial start. And that means avoiding the meagre returns on offer from cash products in favour of letting compound interest work its magic.”

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