Drop in investments for children after switch from Child Trust Funds to Junior Isas

Analysis by Quilter indicates that the proportion of parents investing in the stock market when setting money aside on behalf of children has dropped dramatically since the switch from Child Trust Funds (CTF) to Junior ISAs (JISA).

Quilter’s analysis shows that CTFs were more than twice as likely to be invested in the stock market.

Since their introduction, less than a third of payments into JISA accounts have been into stocks and shares, with most accounts held in cash.

In contrast, around 83 per cent of CTFs are held in stocks and shares, offering potential for stronger long-term growth prospects than cash savings.

Before CTFs were discontinued for newborn children, a total of 50 per cent of all accounts were opened by parents in ‘Stakeholder’ investments.

A further 28 per cent were allocated to investment accounts by HMRC, with 4 per cent of parents choosing to invest through non-stakeholder investment products.

Just 17 per cent of parents chose to open a cash account.

Quilter is today warning that the drop in investment rates risks young people not obtaining the best possible return on money set aside for them.

Rachael Griffin, financial planning expert at Quilter, says:

“This significant fall in investment rates in young people’s savings can be explained by a variety of factors.

“Providers of CTFs were required to offer a stocks and shares option alongside a cash offering. In addition, parents were nudged toward long-term investing by literature and tips supplied by government.

“Finally, where CTF vouchers were not allocated by parents, they were automatically put into investment accounts by HMRC. These were known as Revenue Allocated Accounts (RAAA) but even when their impact is excluded, we can still see that over half (54 per cent) of parents actively chose an investment account.

“Parents opening a CTF were guided toward stocks and shares by government advice that markets could normally be expected to outperform cash over the long-term. Research shows savings and investment plans for children tend to be opened in the early years of their life and the nature of CTFs and JISAs also means that we can be sure the money is locked-up until at least age 18, so they will normally be a long-term investment. 

“The nudge toward long-term investing was powerful with CTFs, but that seems to have waned with JISAs. Government, schools and families should look at promoting long-term investment benefits to young people, especially in such a low interest rate environment where returns on cash are weak.”