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Two thirds of all money put into Junior ISAs over past 5 years has been in cash – losing value as inflation destroys purchasing power

Almost two thirds (60%) of all money placed within Junior ISAs over the past 5 years has been held as cash – rather than investments, says Bowmore Wealth Group.

Money in Junior Cash ISAs (and all Cash ISAs) are currently losing value in real terms with any interest payments far below soaring levels of inflation (UK and US inflation is currently above 6% and 7% respectively). Those looking for the money they have saved for their children’s or grandchildren’s benefit should consider options beyond cash as the real value any cash held in ISAs is currently losing value at circa 5-7% per annum.

Charles Incledon, Client Director at Bowmore, explains: “Putting money in your children’s JISA is the very epitome of long-term investing. Holding cash in such an investment guarantees a loss of money in real terms over the longer term”

“While there may be some stock market jitters at the moment, over the longer-term equities have proven to dramatically outperform cash. Regardless of whether you are investing for your grandchildren/children or indeed yourself, at the very least you want to ensure the value of your pot today increases sufficiently to ensure it retains its purchasing power as prices gradually increase (e.g. over the past 6 months the price of a pint of milk has increased by over 8% (ONS) – therefore your money held as cash buys you less due to the impact of inflation)

£555m flowed into Junior Cash ISAs in the latest year – up nearly £40m from the previous year (from £517m). In addition, the annual contribution limit (£9,000 pa) for Junior ISAs refreshes in April and many may be preparing to deposit more into their child’s Junior ISA.

“Favouring Cash ISAs over investment ISAs is part of a broader issue where UK savers have hesitations about short term fluctuations in the stock market. Investors should not be put off investing in equity markets due to the short-term volatility, especially when they’re saving for a 20 or 30 year horizon.” adds Charles Incledon.

“For many it is simply a question of individual mindset. For example, within the retail space, many can’t wait for the January sales to grab themselves a bargain, but the opposite is true when it comes to investing (i.e. when share prices fall, they are very cautious about putting money into markets). A good way to think about it is the January sales have simply spilled over into investment markets this year, so it is a great time to buy in at lower prices”

Bowmore says the current economic environment means that it is more important than ever that savers should be considering alternatives to Cash ISAs due to record low interest rates and high inflation rates. The Bank of England base rate is 0.25% and lack of competition between Cash ISA providers means that even the best (instant cash) ISAs offer only 0.6% interest.

Those looking to build their wealth will struggle to see good returns from cash ISA providers as the value of their cash will erode over time due to inflation.

Inflation is reaching levels not seen for at least a decade. With inflation so high and interest rates on cash ISAs so low, those looking to invest would be wise to assess other options says Bowmore.

Since 1925, equities have delivered average annual returns of 12.4%, higher than cash (4.9%), global bonds (6.6%), rental property (7.2%) and gold (7.7%).

Even the FTSE100 average annual return is 5.77% (1984-2019) – which is higher than current levels of inflation.

Charles Incledon, adds: “At the moment keeping your money in a cash ISA means it is losing value in real terms at the fastest rate in almost 30 years.”

If today’s inflation stayed the same  for 20 years what would happen to the value of your money in real terms? (Based off an initial £20,000 in the best available Junior Cash ISA and Instant Cash ISA)

Graph assumes inflation rate stays at 5.4% for the next 20 years, FTSE100 performs in line with historic rate of 5.77%, Cash ISA interest rate is 0.6% and Junior Cash ISA rate is 2.4%(current best rates available)

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