British parents’ obsession with cash has knocked £3.4bn off JISA returns

Source: Trustnet

More than 60% of junior ISAs (JISAs) are held in cash, meaning that families are missing out on gains they could potentially make from investing in the stock market.

Wealth manager Quilter calculates that the UK’s child savers have lost out on £3.4bn by sheltering in cash rather than investing in the stock market since JISAs were introduced in 2011.

Quilter has assumed a 2% annual return from cash accounts since 2011 because although some cash accounts offer double that amount currently, the past decade or so includes many years of ultra-low interest rates.

By comparison, the average fund in the IA Global sector has returned 250.8% in total or 10.6% on an annualised basis since JISAs became available on 21 November 2011.

Parents and grandparents across the UK have invested an average of £530m in JISAs every year since 2011. These accounts are now worth £5.6bn, having generated a 2% compound annual return from cash since 2011, Quilter said.

Had the JISAs been funnelled into global equity funds instead they would now be worth £9bn (based on the IA Global sector peer group) – hence the £3.4bn shortfall.

Ian Futcher, a financial planner at Quilter, said: “Given interest rates have been relatively high recently due to inflation, many heads have been turned by attractive junior ISA cash saving rates. People perceive cash as risk free despite inflation decreasing its real terms value and choose not to face the potential volatility inherent to the stock market even though it has historically given better returns.”

Sheltering in cash means that child savers “miss out on the miracle that is compound growth,” he continued, as JISAs have long enough time horizons to ride out periods of short-term volatility in equity markets.

Tim Bennett, head of education at wealth manager Killik & Co, added that confusing saving with investing is a classic but costly mistake.

“The difference between these two key words is simple – saving is putting cash away, whereas investing is all about buying and holding securities, such as bonds and equities,” he explained.

“The problem with confusing the two is it can lead to people keeping too much cash to one side and underinvesting. Over time, this leads to inflation-driven wealth erosion.”

For parents considering moving their JISA out of cash and into the stock market, Trustnet asked several experts about the right mix of investments for a JISA and which funds to choose.