Junior ISAs turn 8

Junior ISAs turn eight years old on 1 November 2019, and parents who split the maximum annual contribution over 12 months every year since then would have squirreled away £31,552 per child, tax free.

• Investment trusts have beaten funds since Junior ISAs launched 
• Largest Junior ISA portfolios have a higher weighting in investment trusts

Junior ISAs turn eight years old on 1 November 2019, and parents who split the maximum annual contribution over 12 months every year since then would have squirreled away £31,552 per child, tax free.

The largest Junior ISA account on the interactive investor platform is, incredibly, nudging an almost six figure sum of £95,000 and the top 2% of interactive investor’s Junior ISA accounts already have more than £50,000 in assets*. 

That said, the vast majority of those with £50,000 plus Junior ISA pots (82%) were born within the Child Trust Fund (CTF) qualifying period (1 September 2002 – 2 January 2011) and in most cases are likely to have converted their CTF to a Junior ISA. But it shows just what can potentially be achieved if you are fortunate enough to maximise your allowances - and then pick some good investments.

Of these top 2% of Junior ISA pots that have grown to more than £50,000, investment trusts account for the largest proportion of the portfolio: 41% is in investment trusts, 33% is in funds, 11% is in direct equities, 8% is in exchange traded products and 7% is in cash.

Overall, the average interactive investor Junior ISA has an account balance of £10,190, and funds are more popular than investment trusts – the average interactive investor Junior ISA account has 37% in funds and 25% in investment trusts. Some 15% is in direct equities, 9% is in exchange traded products and 14% is in cash.

Investment trusts have outperformed funds

It is no surprise that investment trusts are powering the largest portfolios when you look at data supplied by the AIC. Investment trusts have outperformed over the eight years since Junior ISAs launched to 30 September 2019.

Over the last 8 years, investing the annual Junior ISA limit into the average investment trust has returned 10% more than the average fund, returning £48,364 – almost £4,723 more than the average fund. The annual contribution has been pro rata’d in 2011/12 and 2019/20 to allow direct comparisons with regular investing (see tables below).

Moira O'Neill, Head of Personal Finance, interactive investor, says: "With eight years of reasonably benign markets, it's no surprise to see investment trusts outperforming, because they have some key structural advantages. The ability to gear (borrow) to enhance returns can make them the perfect bull market vehicles – delivering higher performance when markets are rising. But if markets take a turn for the worse, losses in investment trusts tend to be greater: the 2015/16 tax year is a case in point, when the average fund was down 2.5% and the average investment trust down 4%. As ever the key is to have a balanced portfolio and look at both funds and trusts – as our most successful customers tend to do."

Lump sum investing has done better

Using data supplied by the AIC, interactive investor also found that annual lump sum investments into a Junior ISA have produced better returns than the monthly 'drip-feed' approach since the launch of the account 8 years ago.

Parents who invested the annual Junior ISA contribution allowance as a lump sum into a 'middle of the pack' ie the average investment trust from 1 November 2011 and the start of every tax year subsequent would have seen their contributions to 30 September 2019 grow some £2,000 more than the £46,260 achieved by those who spread their JISA allowance evenly every month. 

When it comes to investments through the average open-ended fund, lump sum investments also trumped the performance of drip-feed investing by over £1,000 over the same period (£43,641 versus £42,450). Both sets of data are based on total contributions of £31,552.

Moira O'Neill, Head of Personal Finance, interactive investor continues: "Drip-feeding your investments monthly helps smooths out the peaks and troughs of the market, buying fewer shares when prices are high and more when prices are low – a process known as pound-cost averaging. But over the long-term, annual lump sum investing tends to do better, because there’s more money working for you from the start.

"There are never any guarantees and past performance is not an indicator of future results. The stock market can be a volatile place to put savings for your child, but 18 years is ample enough time to help capture its long-term potential. Despite inflation and poor interest rates hammering cash savings accounts, many parents are still shunning the potential of returns through stocks and shares investment. Of the 907,000 junior ISA accounts subscriptions in in the 2017-18 tax year (the latest available figures), around 70% by number of accounts was in cash. But even if your child has an eight-year-old cash JISA – there may still be ten years left to grow and it’s far from too late to look at other options."

There is no extra fee for holding a Junior ISA for existing customers of interactive investor, but it is not a stand-alone product – customers must have an account with us to apply for a free Junior ISA account on behalf of their child.

Myron Jobson, Personal Finance Campaigner, interactive investor, says: "A stocks and shares Junior ISA is a tax efficient way of putting money aside for your child to give them a financial leg-up at the start of their journey into adulthood. However, one of the main barriers to investing is knowing where to begin. Research from our Great British Retirement Survey shows that 30% of parents* believe they lack the knowledge to manage money and investments.

"It is difficult enough investing for yourself, so the prospect of investing for your children and the possibility it may go wrong is a challenge for even the most experienced investor - which may explain why so many parents choose to save their Junior ISA in cash. However, history shows that even a 'middle of the pack' fund is likely to compare favourably with cash over 18 years. So, you don’t need to be an expert stock picker to benefit. 

"What you do need is time to ride out the inevitable ups and downs in the market for a return that has tended to trump cash. The rule of thumb is to invest at least five years to allow for stock market volatility – and preferably ten.

"It is also not too late for parents who save through the now defunct Child Trust Fund to switch to its younger sister, the Junior ISA. Stocks and shares Junior ISAs often provide a more comprehensive range of investments and potentially lower charges than Child Trust Funds."

Annual lump sum cumulative performance from 1 November 2011 – 30 September 2019. Source: AIC/Morningstar

(Lump sum investment from 1 November 2011 and the start of every tax year subsequent) 

Monthly drip-feed full Junior ISA allowance from 1 November 2011 – 30 September 2019 Source AIC/Morningstar

(Regular investing from 1 November 2011 and the start of every tax year subsequent)

Past performance is no guide to the future and the value of investments, and the income from them, can go down as well as up and you may not get back the full amount invested.