Parents who either invest or save towards their child’s future via a Junior Isa rather than Premium Bonds will likely leave a child much better off, new research suggests.
It was found that those who invested in a stocks and shares Junior Isa could typically expect to leave their child two to three times better off, according to analysis by wealth management firm, Quilter.
Its calculations suggest that if £3,600 was put into a stocks and shares Junior Isa when it was first made available in 2011, it would currently be worth nearly £10,000.
Three-fifths of the £1 billion put into to Junior Isas in 2019/20 sit in cash accounts.
This is compared to just £4,000 had the money been invested in Premium Bonds during the same period.
Premium Bonds have risen in popularity during the pandemic with the number of eligible £1 bonds rising from 86billion to 113billion since March last year.
The minimum investment amount is £25 and rule changes in 2019 mean aunts, uncles, godparents and even family friends can gift Premium Bonds, making them a popular present.
It’s worth bearing in mind the nominated parent or guardian will manage and ultimately be able to cash in the Bonds.
The odds of each £1 Bond winning a prize is currently fixed at 34,500 to 1 with the prize fund rate currently at 1 per cent.
According to numbers crunched by data scientist Andrew Zelin, savers who invest £1,000 into Premium Bonds will have to wait almost 3,500 years for a 50:50 chance of winning the amount they put in.
Looking at past performance, Quilter’s analysis suggests that saving for a child’s future would be better served away from Premium Bonds.
The maximum Jisa limit in 2011 was £3,600 and calculations show that if the full amount was put into a stocks and shares Jisa and invested in the IA UK All Company index it would be worth £6,918 today.
If it had been invested in the IA Global index it would be worth £9,580 today assuming fees of 0.5 per cent.
But if the same amount was invested in Premium Bonds over the same period, it would be typically worth £4,025, using historical prize fund rates which give an average return of 1.25 per cent.
Are Premium Bonds worth holding?
Premium Bonds are probably Britain’s best loving savings product but are they worth holding?
The savings lottery delivers 100% government-backed protection and a theoretical 1% return – dependent on luck.
But a new report highlighted just how unlikely people are to win big prizes. In fact, unless you have a sizeable amount in bonds, you should expect a long wait for anything over £25.
Even a saver with £15,000 in bonds should expect to wait 14 years to win a £50 or £100 prize, data scientist Andrew Zelin said.
But does that matter or are those uninspiring regular £25 prizes a much more useful source of returns? On this podcast, we dig into Premium Bonds, looking at the odds, the study on big prizes, what our readers have told us, and also how much people hold.
Abigail Banks, a financial planner at The Private Office, said: ‘Given the timeframe to access the money within a Junior Isa could be 18 years plus, there is an argument to consider investing the funds to maximise the potential for returns in excess of those available from cash.
‘Of course the value of an investment can fluctuate, but given the timeframe, even if the value of the investment falls in the short term, there should be enough time for it to recover before it is needed.
‘If you were to contribute £50 into a Jisa account when your child is born, and each month afterwards for 18 years, with the funds generating a growth rate of 5 per cent per annum, the estimated future value of your investment would be over £17,300.
‘If you were to contribute the maximum of £9,000 each year for 18 years, at a growth rate of 5 per cent, the estimated future value of the investment could be around £266,000.’
It is worth pointing out here that money in a Junior Isa belongs to the child and they obtain full access to the money when they turn 18.
Junior Isas have also risen in popularity during the pandemic with account subscriptions recently surpassing the one million mark for the first time since the accounts were launched in 2011.
Three-fifths of the £1billion put into Jisas during the last tax year sit in cash accounts.
But analysis shows that even when held in cash, this will typically be more lucrative to your child in the future than Premium Ponds.
At present, on average a Premium Bonds saver could expect to see a return of 1 per cent, whilst the best cash Jisa currently pays 2.5 per cent.
Anna Bowes, co-founder of Savings Champion said: ‘Although you might be really lucky and earn a lot more than the interest you could earn in the Jisa, an investment into Premium Bonds – especially a small amount – may never win any prizes.
‘If you were to deposit £50 a month from birth into a Jisa, assuming an interest rate of 2.5 per cent, which is currently the highest cash Jisa rate, at 18 your child could have over £13,600.
‘If you and your friends and family could stretch to £9,000 a year (the current maximum that can be deposited per annum) the amount could be a staggering £206,000 – that’s a huge responsibility but could transform your child’s financial future.’
Should you opt for a cash or stocks and shares Jisa?
Cash is favoured for both adult Isas and Junior Isas, with over two-thirds of such accounts being cash only products, according to Quilter.
Junior cash Isas offer parents better returns than other savings vehicles with the added benefit of higher interest which is all tax free.
But with UK inflation, currently at 3.2 per cent and expected to rise to 4 per cent or more in the coming months, even those with the market leading 2.5 per cent cash Jisa deals could temporarily see the value of their savings fall in real terms.
Whether someone opts for a cash Jisa or a stock and shares Jisa will largely depend on their approach to risk.
The length of time a parent or guardian intend to either save or invest for will also be key to any decision.
For example, a parent looking to get started when their child is two or three might make a different choice to a parent looking to put aside money for their teenager.
James Blower, founder of the Savings Guru said: ‘If that time horizon is 10 years plus then you should almost certainly go for a stocks and shares Isa and this is because, over a five year time period, stocks have outperformed cash in the vast majority of those periods and in almost all periods 10 years plus.
‘But if you are looking at less than five years, then definitely look at cash Jisas.’
Some may also opt to save for their children in their own Isa wrapper – you can read more about this here: Should you open an investment Junior Isa over a cash one to build up a nest egg for your child… or just use your own tax-free allowance?
Advice when deciding how to save for your child’s future
By Tom Selby, head of retirement policy at AJ Bell:
1. If you’re a saver, shop around
If you don’t want any investment risk whatsoever in your child’s investment portfolio, then shop around for the best possible cash rate.
However, make sure you keep in mind that low interest rates mean inflation will eat into the value of their pot over the long-term.
2. If you invest then consider the time horizon
If you want to invest the money in stocks and shares then think about your goals, time horizon and how much risk you can tolerate.
Generally, those with a longer investment time horizon have more latitude to stomach the short-term ups and downs of stockmarkets, although this will vary from person-to-person.
3. Consider the alternatives
Also, remember there are options outside ISAs and Junior ISAs. For example, SIPPs and Junior SIPPs offer upfront tax relief – although you won’t be able to access the money until age 55 at the earliest.
4. Keep your fees down
However you choose to invest, make sure your costs and charges are kept as low as possible, as even relatively small differences can make a huge difference to the value of your fund over the long-term.
5. Be Tax efficient
And, crucially, look to tax sheltered products like ISAs and SIPPs to ensure you keep as much of your hard-earned money as possible out of the hands of HMRC.’
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