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Have 100,000 parents bought the wrong Junior Isa?


In the last tax year, Junior Isa account openings rose at a breathtaking pace, rising by 46pc. A total of 136,000 families took advantage of these tax-free accounts.

Junior Isas have proved popular since they were introduced in November 2011. A total of 432,000 accounts have now been opened.

This figure is only going to rise, particularly from next April, when the six million families trapped in the poor rates on child trust funds will be able to switch their money to Junior Isas, which offer much better value for money.

This year parents can invest up to £4,000 in a Junior Isa, although many will probably prefer to save relatively small amounts each month. But over an 18-year time frame setting aside as little as £50 a month can build up to a substantial nest egg.

However, the majority of parents will not enjoy such growth. Three in four Junior Isa accounts opened over the past year, a total of just over 100,000, have been invested in cash as opposed to stocks and shares.

Of course not everyone feels comfortable putting their savings at the mercy of the stock market. But when it comes to investing for children the time horizon is so long that it makes no sense to seek shelter in cash.

Not only does an 18-year period give parents adequate time to ride out the peaks and troughs of stock markets but through buying income-generating investments and reinvesting the returns the odds of not beating cash are extremely low.

The majority of cash Junior Isas pay interest of 2pc-3.25pc. This is much better than the rates offered to adults, but picking the right stocks and shares Junior Isa could net parents more bang for their buck.

Over the past two decades British shares have on average delivered 7pc a year. If you invest £50 a month and achieve returns of 7pc you will end up with £21,344 after 18 years. By contrast the best-paying cash Junior Isa, which is from Nationwide and pays 3.25pc, would generate only £14,711.

While stock markets can fall in value, there is also a risk in investing in cash: inflation.

A £100 investment in a building society cash account made in 1987 – the year the Pep, the predecessor to the Isa, was introduced – would today be worth £440. The true spending power of this money, though, which reflects the impact of inflation, would be nearer £195.

In contrast the overall stock market, which during this time went through two spectacular crashes, would have made investors a much better return – £767 in real terms.

By opting for the supposedly “safer” option of cash as a long-term investment, one outcome is almost certain – any gains will be heavily eroded by inflation over time.

Source: Telegraph

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