Parents investing for their children may be missing out on the opportunity to achieve better returns by plumping for lower risk investments despite the longer timeframe kids have to ebb out stock market highs and lows.
Two thirds of parents (64%) save on behalf of their child, but according to research from M&G Investments, one in three (31%) who put money away do so with more added caution than they would take for their own savings or investment portfolios.
A mere 10% of parents say they would take more risk in their child’s portfolio than in their own.
In addition, while the majority of Moneywise readers pick Stocks and Shares Junior Isas (Jisas) over cash savings for their kids, HMRC figures show that the vast majority of families put kids’ money into Junior Cash Jisas.
Of the £858 million in Jisa accounts, two thirds (£525 million) is in cash accounts. The interest rates on these accounts, while higher than Cash Isas for adults, are typically around 3%, with a best buy rate of 3.25% on the Coventry Building Society Junior Cash Isa.
However, according to M&G, if a parent had invested £1,000 annually into a Stocks and Shares Jisa, the pot would be £2,304 better off than in a cash savings vehicle, based on investing in a FTSE All Share Index Tracker.
The investment firm believe that there are several factors at play when it comes to parents opting for safer cash savings than investment Isas for their kids. One in three parents (31%) say they would be more inclined to invest in stocks and shares if there was less risk associated. Currently, any money in a Stocks and Shares Isa or Jisa is not covered by the Financial Services Compensation Scheme (FSCS). Cash Isas, however, are protected up to a value of £85,000 per financial institution.
Other barriers for parents included a lack of knowledge of the investment products available: 29% said they didn’t know enough to feel confident investing. One in four parents (27%) said they would only invest if they were confident that the returns would be consistently better than cash savings.
‘Kids could potentially miss out financially’
The long-term impact of parents’ failure to take advantage of better rates of return could mean less being passed on to kids in the future.
Ritu Vohora from M&G Investments comments: “Parents and grandparents are doing the right thing for their children or grandchildren by putting money aside, but their reluctance to invest it, means their kids could potentially miss out financially.
“Our research shows parents sometimes lack the knowledge and confidence to invest rather than save, and therefore take a conservative approach. Their naturally protective instinct means they also tend to overplay the risk of market volatility while underplaying the impact of inflation.
“No matter how much parents save or invest, every little bit will help in the future, especially if they start when their children are young. The simple reason is compounding. The sooner money is invested the longer it can work to deliver returns.
“A Stocks and Shares Jisa should always be considered as a long-term investment, especially when accounting for the impact of inflation. However, if your child will need to access their money in the near future, then keeping their savings in cash might be a better option.”
While there is more risk associated with investing in Stocks and Shares than in simple cash savings there are ways of mitigating the risk through diversified fund picks. To read more about building a portfolio, check the Moneywise's First 50 Funds for beginners guide.