JISA - Cash or Stocks and Shares?

Bryn1976

Hi all
I have a small amount (£1000) that I would like to set aside for my son, aged 8, until at he is at least 18. I plan to add around £100 per month to it.
I know these are pretty uncertain times, but just wondering if there are any strong feelings about whether to go for a Cash ISA (eg Coventty 3.6% AER variable) or to go for a Stocks and Shares option? I was thinking of the Vanguard Lifestyle 60% as it seems a popular choice for new investors.
Any thoughts? Thanks very much in advance!

Alistair31

If you have 10 years a S&S LISA would be my recommendation. 

Alistair31

If you have 10 years then S&S would be my recommendation. 

coachman12

A really good article, recently updated, that will tell you more than anyone on this Forum. Good luck with your thoughtful measures for your son.
https://www.moneysavingexpert.com/savings/child-savings-tax-free/

bowlhead99

coachman12 said:

A really good article, recently updated, that will tell you more than anyone on this Forum. Good luck with your thoughtful measures for your son.
https://www.moneysavingexpert.com/savings/child-savings-tax-free/

Maybe you underestimate the collective wisdom of the forum members. The question per OP and thread title was whether to go for a cash junior ISA or an S&S (investment) junior ISA. Whereas the article linked that will tell the OP 'more than anyone on this forum' is specifically about cash savings accounts for children with some tips on encouraging them to save, and does not attempt to compare savings with investment options or even mention that cash JISAs or S&S versions of JISAs actually exist. JISAs aren't mentioned at all unless you follow a hyperlink to an entirely separate guide.

Not that it's a bad article if the different ways of saving in cash are being considered. I only mention its inadequacy for the question at hand, as a few minutes earlier you'd posted on the 'in hindsight...' thread that it was amazing that nobody was giving a straight answer to a simple question. Your link doesn't touch on the question here at all!

If it were me I would put the lump sum into an S&S ISA in a simple mixed asset fund, which will bobble around in value but over a 10yr+ time period should be able to do better than cash. To keep it simple, the rest of this year's £100pm could go into the same fund.

However, one thing to be aware of is that with a 10 year timeframe, if you are dripping money into it monthly, the money will not all be invested for the full ten years. The first £100 would be, but the last £100 would only be invested for a month before it could be accessed by the child (i.e. then, adult). On average, the total amount of cash only spends about five years invested out of the decade. Shorter timeframes are not ideal for S&S investing because the returns can be somewhat random, there is not enough time to get a good mix of down years, flat years and up years. So what you might like to do as time goes on in future years is start putting part (and eventually all) of the £100pm into a cash product - whether cash JISA or just the most competitive cash account you can find. 

People will tell you that investments are much better than cash for long term objectives, which is generally true - but actually kids' cash accounts and JISAs can pay a significantly better interest rate than the sub-inflation rates we find on adult accounts. Banks like to ingrain their brand in the child's mind for later, and also there are practical limits on how much cash would be in the account at a point in time, so the higher interest rates don't cost the banks as much as if they offered it on an adult account with a million pound limit.  So it seems quite reasonable that once you've set off on the investing journey, you do consider the cash options too. A child is allowed both a cash and S&S JISA at the same time (though only one of each).

 

coachman12

I once again recommend Bryn to study the MSE link which I provided earlier. It is more comprehensive than anything else and may give Bryn other ideas as well as the admirable options he has already mentioned as possible choices. Once again, I congratulate him on his thoughtful project to help his son.

puk999

coachman12 said:

I once again recommend Bryn to study the MSE link which I provided earlier. It is more comprehensive than anything else and may give Bryn other ideas as well as the admirable options he has already mentioned as possible choices. Once again, I congratulate him on his thoughtful project to help his son.

😂

Alexland

coachman12 said:

I once again recommend Bryn to study the MSE link which I provided earlier.

You are still missing the point that the article doesn't address the OP's question. They already know there are very good cash rates available for children and the issue they are pondering is if a S&S product might do better.

When our kids were born we took out S&S JISAs given that 18 years was a good investment timeframe and traditionally S&S does better than cash however after a few years of good returns it became obvious that high market valuations were going to damage future returns so I moved them into 3%+ Cash JISAs a few months ago despite them still being very young.

When the crash started I felt there was a good chance of a new S&S opportunity developing so transfered them back to S&S and invested somewhere near the bottom (so far..) to get a good gain on the rebound.

However on today's partially recovered market valuations it's starting to look a bit marginal again. I figure that with low costs and a high equities ratio then S&S is still likely to do better in the medium term. However for VLS60 then I would be sceptical that from investing now it would return enough after fees to beat the current Cash JISA rates.

bowlhead99

coachman12 said:

I once again recommend Bryn to study the MSE link which I provided earlier. It is more comprehensive than anything else and may give Bryn other ideas as well as the admirable options he has already mentioned as possible choices. 

One might expect that if it were to be more comprehensive than anything else in addressing the question of whether he should prefer an S&S JISA to a cash JISA, it would at least mention the circumstances in which they could be useful (including the fact that S&S JISAs actually exist).

The choice of investments vs cash savings is a personal one as each carry risk (investment risk vs shortfall risk/inflation risk), although the longer the timescale, the more attractive the idea of using investments will be. Generally, when the idea of a parent putting away £10k+ of their money over the course of a decade for the benefit of a child is mentioned on the forum, the broad considerations are:

- if the child might need access before 18, stick it in a cash savings account in the name of the child (instant access, fixed deposit or regular saver- whichever is more suitable) or if investment is preferred to savings and the timescale is long enough, use a bare trust account;

- if the child is not going to need access until 18, use a cash or S&S JISA (formerly CTF). The longer beyond age 18 before the child night need access to the last penny of it, the more aggressive investments could be justified.

- if the donor prefers to prevent access by the child until some point beyond age 18 (i.e. later than the age of legal capacity), would need to consider using the adult's own tax wrappers (ISA, pension) or tax allowances in unwrapped accounts, and then simply gifting the money to the child later. This can have adverse consequences for inheritance tax purposes (wealthy people) and means-testing purposes (less-wealthy people) and so if amounts are significant, the cost of a discretionary trust might be justifiable - though unlikely to be the case with only a hundred pounds going in every month or so.

Good luck with it.

ratechaser

Our children's JISAs have always been in cash, since birth (which is now 16 and 14 years for the 2 of them respectively) and we have made the maximum allowed contributions every year. Conventional wisdom would suggest that was a mistake, however a quick comparison of the FTSE100, now versus when they were born suggests that if it had been invested in a simple UK tracker, it would be up about 35% for the elder child, and barely flat for the younger.

Whereas it's averaged well over 3% PA in cash ISAs due to, as Bowlhead mentioned, the fact that banks tend to be generous with junior savings rates - hook them young... right now both ISAs are with NS&I at 3.25%. 

It's a simplistic comparison I'll admit (and doesn't include the effect of dividends), but suggests that cash has done pretty well for them in this case, despite a long period of historic low base rates, and without having to take any capital risks. 

I'm sure there are plenty of better performing funds than FTSE trackers that would have meant my kids could have ended up with substantially more at age 18 than they will get, but I suspect most parents would want to be reasonably cautious with a future nest egg for their little darlings...

bowlhead99

ratechaser said:

 Conventional wisdom would suggest that was a mistake, however a quick comparison of the FTSE100, now versus when they were born suggests that if it had been invested in a simple UK tracker, it would be up about 35% for the elder child, and barely flat for the younger.

It's a simplistic comparison I'll admit (and doesn't include the effect of dividends)

The effect of ignoring dividends received and reinvested over a period like 16 years is huge though. If we go back to a date when the FTSE was around 4150 (so ~35% growth to yesterday's 5598) and at which someone born then would be age 16 now, we're probably looking at somewhere between July and late September 2003.

Since the last week of September 2003, FTSE capital value went from 4157 to 5700 (35%), but the total return of the FTSE 100  dividends reinvested is 150%, and HSBC's FTSE 100 tracker fund is up 130%. (i.e. after the effect of product fees, which for the first decade used to be much higher than they are today). The tracker fund would have been 200% before the recent fall.  Annualised over 16.5 years, the 130% is a nice 5.2% return, which would have been 6.9% if you had conveniently got out just before the crash a couple of months ago.

I'm sure there are plenty of better performing funds than FTSE trackers that would have meant my kids could have ended up with substantially more at age 18 than they will get, but I suspect most parents would want to be reasonably cautious with a future nest egg for their little darlings...

Yes you're right that the FTSE100 is a poor index to track because it only tracks stocks that happen to be listed in the UK, and is heavily skewed to particular industries with most of the money being allocated to a few giant companies. Its return lags the other global indexes for the last couple of decades.  Whenever any newbie investors suggest using it on this forum, they are usually told that it's a specialist index designed to be held as part of a portfolio with all the other specialist regional funds and other asset classes. So if being reasonably cautious, the parent would avoid that specialist fund and buy something allocated more broadly. 

The problem is that parents have always heard of 'the Footsie' index because it's been mentioned on the daily TV news since they were a child - whereas 'how to invest in a diversified way across global regions and asset classes' is not something that is routinely mentioned on breakfast telly, news at ten, radio news bulletins or daily papers.

Simplistically if you compare a mixed-asset investment product to the artificially high returns that banks' marketing departments will pay on kids' savings accounts -  the yield of dividends and interest from the investments (received and reinvested within the product) will cover a good proportion of the rates you would get in a decent child's cash account, and then the capital return on top is a bonus which is somewhat unknown until you look back with hindsight (but is generally positive over long time periods).

Over a decade or two, you would generally expect cash to lose out to inflation while investments should do better with more volatility - although child cash accounts don't lose out so badly as one might think, because banks pay a premium to children, as in Ratechaser's example, and you can continue to shop around for the best rates. The volatility of investments while drip-fed for a decade or two is not (theoretically) too much of an issue when you know you are not allowed to access the money in a JISA account anyway. However, it can be shocking when you check into the account and see a big year on year drop (for example over the timescale that the FTSE100 from Sept 2003 to now returned 200%+ pre-crash and 150% post-crash, the FTSE 250 returned 500% pre-crash and 350% post crash, and people naturally get worried during a crash, and wonders if they should 'cash out the loss' and move the money into a cash JISA and then risk missing the recovery.

So while 'a decade or two' is a fine length of time for investments because all the ups and downs are more likely to average out to a decent return... when your child is more than a toddler and is likely to want to access some or all of the money at age 18, you don't really have the 'or two' part of decade or two, and we don't really know how markets will behave over 5-10 years. So people with 10 years or fewer left to run, planning to add more money as time goes on, are probably best starting with a mixed asset fund that could be quite high in equities but then using more cash products as time goes on - so that the investment is quite heavily diluted by cash by the time you get to the last few years and don't have time for investment falls to be recovered.

Everyone has different circumstances of course and people who are maxing out the JISAs at £4-5k a year for 18 years are probably expecting their child to use that sort of nest-egg for something more substantial than driving lessons and a year of university costs, and so it's more likely that the money will be spent some years after it  first becomes accessible, and a long timescale means investments will be more useful for the nest-egg than cash which can't grow so much in real terms.  Whereas people who are dripping smaller amounts of money into the JISA might expect the child to take the money relatively quickly after age 18 for (e.g.) a car, some travel and some moving-out from home costs - and so age 18 would be seen as the endpoint, making investments less appropriate if there's less than a decade to run until that point.