PER­SONAL AC­COUNT

The Daily Telegraph - Your Money - - YOUR MONEY - Richard Dyson

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

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