Please don’t put your child’s or grandchild’s Isa money into cash
The taxman’s latest instalment of Isa statistics published on Thursday – showing what we choose to invest in, and how much – suggest that millions of us remain disciplined savers and investors.
There are some interesting trends, though. The amount of Isa money invested in shares listed in European markets, for instance, continues to grow. It was only in August 2013 that the rules permitted us to own German, French, Swiss or other EEA stock in our Isas. Yet in the four years since, the sum of these European holdings (and this excludes popular funds that invest in European stocks, which will account for many tens of billions of pounds more) has gone from nothing to more than £9bn.
This is a fascinating and positive trend: it shows that more investors are making use of cheaper, convenient overseas share trading to spread risk and gain exposure to opportunities that London’s market, however broad, just doesn’t offer. There is nothing quite like BMW listed in London – and unsurprisingly it is one of the most popular German shares owned by UK Isa investors.
More people are putting Isa money into investment trusts, too. These are companies listed on the London Stock Exchange whose sole purpose is to buy other assets in order to generate growth and income for shareholders.
is an unapologetic cheerleader for investment trusts: invented in the late 1800s, they drifted from mainstream investors’ radar in the Sixties and have remained regrettably in the wings ever since, despite their fantastic records of consistent returns and low costs. (If you want regular coverage of these portfolios, read the Questor column each Thursday in the Business pages.) Isa holdings in these investments have more than doubled since 2012.
But there was one area where the Isa stats were disturbing.
There has always been a tendency for savers to favour cash over shares. And because savers earmark their money for different purposes there is nothing inherently wrong in this.
But the stats revealed that Junior Isas, the accounts specially devised to help parents and grandparents save for children over the long term, were predominantly holding cash. Of the £3.3bn in Junior Isas, £2bn is in cash. That’s wrong – and here’s why.
If you want to save cash for your child, there is no need to use a Junior Isa. You are simply wasting the tax break if you do.
It is very unlikely that a child will earn enough interest on cash savings held outside an Isa – especially in today’s climate of ultra-low rates – to result in a tax liability. Instead, use the Isa for shares, which should eventually (see below) produce significant income and capital gains. Even if you’ve no extra money to save into your child’s Junior Isa now, you may well find some in future – or a relative may contribute – in which case the Junior Isa is valuable. You The children cannot access the cash until age 18, so in most cases this money is going to be invested for a decade or more.
I understand that some people have an aversion to shares. But statistically the chance of losing money over longer horizons is low. That doesn’t mean it won’t happen: it’s just very unlikely to. Crunching more than a century of UK stock market data suggests that in any five-year period a basket of shares has a three-in-four chance of beating cash. In any 10year period, that rises to a nine-in-10 chance. And if you hold shares for 18 years it rises to 99pc.
On the same century-plus mass of historic data, it’s been calculated that shares generate an average annual return of 5.6pc if held for any 10-year period. Cash generates 2.1pc (with inflation being higher at 3pc). Hold the investment for any 25-year period, though, and shares generate an annual 8.7pc, compared with cash’s 4.6pc. So not only are the chances of loss low but the likelihood of significantly beating cash is high.
Shares won’t fire every child’s imagination. But as the pot grows it will become more interesting.
BMW’s shares, quoted in Frankfurt, above, are among the most popular European investments held within Isas