Whilst cash certainly has its merits, offering stability and easy access, it often struggles to keep pace with inflation. As a result, cash could fall short for those aiming to build a meaningful nest egg for a child’s future. A long-term investment in a stocks and shares Junior ISA could be a better alternative.
Many savers thinking about a nest egg, whether for themselves or for their children, are inherently mistrustful of stock markets, on the grounds that any investment is at risk of losing value.
They would rather keep their capital safe, accessible and earning reliable interest, than speculate on the off chance of better returns down the line.
That’s an entirely understandable point of view and is reflected in the fact that out of the 22.3 million adults in the UK who hold an ISA, 18 million of those hold a cash ISA¹.
Interestingly, when it comes to building a long-term fund for their children, parents tend (by a relatively small margin) to favour stocks and shares Junior ISAs (JISAs) over cash JISAs¹.
But research published by the Investment Association in April found that those parents who themselves hold cash ISAs are twice as likely to open a cash JISA over a stocks and shares one for the next generation². And that’s potentially bad news for their children’s financial future.
The case for cash
It’s certainly true that cash in a savings account is relatively safe, insofar as savers are very unlikely to lose their capital. UK banks and building societies rarely go bust, and savers are protected up to £85,000 through the Financial Services Compensation Scheme if they do³.
It’s also the case that no one should start investing in the stock market before they have accumulated a sensible ‘cushion’ of easily accessed cash that they can draw on to fund short-term plans, big-ticket purchases and especially emergencies.
As far as provision for the next generation is concerned, a similar principle applies. A children’s savings account gives your kids easy access to their pocket money for holidays or more expensive toys or gadgets – and helps get them in the savings habit as well.
If you want to ensure your child’s money helps them to get a head start in life, however, a JISA could be a better bet: you can contribute up to £9,000 each tax year⁴ and the money cannot be touched until they come of age.
Moreover, it is currently possible to find cash JISA accounts paying inflation-beating interest, which means that your child’s money is actually gaining value in real terms - though any real growth is likely to be pretty limited. The top cash JISA is currently paying 4.15%⁵, ahead of inflation at 3.4%⁶.
Where cash isn’t king
The Investment Association’s research² found that the main financial goals for parents contributing to a Junior ISA (whether cash or stocks and shares) for their child are either university costs or a first home (though the child will have the final say, as they have control of the fund once they reach age 18).
But there are several substantial drawbacks to using cash to fund your child’s key longer-term goals.
One obvious one is that unless you have locked into a fixed term account, interest rates tend to fluctuate as the Bank of England adjusts the base rate. In many cases the rate is slashed anyway after a certain period of time - a year, say – so you’ll have to remember to transfer to a better-paying account at that point.
Perhaps less obvious but crucially important is the fact that over the long term, cash accounts, including cash JISAs, tend not to keep up with inflation.
As the Investment Association report observes: “If you had put £9,000 into a Junior cash ISA 18 years ago with the hope your children would use it to fund a university degree or buy a first home, it would be worth £7,453 today in real terms, adjusting for inflation.”⁷
In other words, prices have gone up faster than the interest earned on the average cash JISA, so your child’s precious pot is actually losing real purchasing power.
In effect, cash is indispensable for you and your child’s short-term goals and as a back-up measure for the family when things go wrong, but as a longer-term option it represents a lost opportunity.
Stock market strengths and limitations
The basic principle that underpins the success of long-term equity investment is that over time, markets tend to rise.
Of course, there are no guarantees that past performance will be repeated in the future, and yes, market fluctuations mean there will be periods where your holdings lose value.
However, over a period as long as 18 years, if money in a stocks and shares JISA remains invested, the likelihood is that your child will see decent real growth in their nest egg.
The IA research also found that if that £9,000 had been invested for 18 years in a typical global equity fund via a stocks and shares JISA, it would have been worth £20,802 (as at end 2024).⁸
Investment trusts, because of their closed-ended structure, tend to outperform most open-ended fund sectors over the long term, and it’s worth noting that £9,000 invested in the average global investment trust 18 years ago would now be worth more than £50,000.⁹
However, there are many pretty unremarkable funds available, so if you decide on equities for your child’s JISA it’s important to do your research.
JPMorgan’s stable of highly regarded investment trusts provides worldwide coverage, focusing on high-quality companies that are strongly placed to withstand market volatility and bought at sensible prices.