Investing for kids ‘dropped dramatically’ with Junior ISA switch
The switch from Child Trust Funds to Junior ISAs has led to a dramatic fall in the proportion of parents investing in the stock market, ultimately leaving them with lesser returns.
Parents of children born on or after 1 September 2002 were given £250 cash vouchers (£500 for low income families) as a way to help them on their savings journey.
Once opened, parents had the option of choosing to invest the Child Trust Fund (CTF) in cash or funds that invested in stocks and shares.
Of the 6.3 million CTFs opened for children born between September 2002 and January 2011, about 4.84 million of them were invested in funds that invested in stocks and shares, but more than a million were invested in cash.
Analysis from wealth manager Quilter revealed that CTFs were more than twice as likely to be invested in the stock market, compared to Junior ISAs (JISA) which replaced them in 2011.
Since their introduction, less than a third of payments into JISA accounts have been into stocks and shares, with most accounts held in cash, Quilter revealed.
In contrast, around 83% of CTFs are held in stocks and shares, which Quilter said “offers potential for stronger long-term growth prospects than cash savings”.
Before CTFs were discontinued for newborns, half of all accounts were opened by parents in ‘Stakeholder’ investments.
A further 28% were allocated to investment accounts by HMRC, with 4% of parents choosing to invest through non-stakeholder investment products. Just 17% of parents chose to open a cash account.
£700m of CTF assets will mature this tax year and a total of £7.5bn over the next decade, according to HMRC figures. HMRC says about 55,000 CTFs will mature each month from now on.
Quilter warned that the drop in investment rates risks young people not obtaining the best possible return on money set aside for them.
Rachael Griffin, financial planning expert at Quilter, said: “This significant fall in investment rates in young people’s savings can be explained by a variety of factors.
“Providers of CTFs were required to offer a stocks and shares option alongside a cash offering. In addition, parents were nudged toward long-term investing by literature and tips supplied by government.
“Finally, where CTF vouchers were not allocated by parents, they were automatically put into investment accounts by HMRC. These were known as Revenue Allocated Accounts but even when their impact is excluded, we can still see that over half (54%) of parents actively chose an investment account.
“Parents opening a CTF were guided toward stocks and shares by government advice that markets could normally be expected to outperform cash over the long-term. Research shows savings and investment plans for children tend to be opened in the early years of their life and the nature of CTFs and JISAs also means that we can be sure the money is locked-up until at least age 18, so they will normally be a long-term investment.
“The nudge toward long-term investing was powerful with CTFs, but that seems to have waned with JISAs. Government, schools and families should look at promoting long-term investment benefits to young people, especially in such a low interest rate environment where returns on cash are weak.”