ANYONE hoping to secure their children’s financial future may be well advised to invest in an Alliance Trust Junior Isa (Jisa) for if they do, Alliance Trust said last month, then said children could be millionaires by the age of 42 years and seven months.
The catch? They have to contribute the maximum Jisa allowance of £340 every month from birth followed by the maximum £1,270 a month once they reach adulthood and the cash, which will be invested into stocks and shares, must grow at a rate of five per cent every year.
While such levels of saving may be beyond most people’s means, Sara Wilson, head of platform proposition at Alliance Trust Savings, had a point when she said that “at current low interest rates, money held in cash accounts has less potential for long-term growth than if it is invested in the stock market”.
Indeed, while children’s savings accounts have in the past escaped relatively unscathed from falling interest rates, recent research from website Moneyfacts has found that over the course of 2016 there have been more than 100 rate cuts across these accounts.
The average rate they pay has fallen from 1.61 per cent a year ago to 1.39 per cent today, with the lowest rate now sitting at 0.1 per cent while the highest is 3.25 per cent. Some fixed rate regular savings accounts have seen cuts of up to two percentage points while on some cash Jisas the drop has been by as much as 2.25 percentage points.
For Jo Wheatley, associate editor at parenting website Netmums, the cuts only serve to create extra stress for parents who are already worried about how their children will be able to fund their futures.
“A lot of mums on our forum say they struggle to save money as it is and interest rates being cut on children’s savings accounts makes things worse for parents,” she said.
“You can expect to spend around £9,000 a year at the moment on university tuition fees and when you add to that rising house costs, it’s not surprising our members are worrying about their children’s futures.”
For Rachel Springall, finance expert at Money-facts, it is “hugely disappointing” so many banks and building societies have chosen to treat children’s accounts in the same way as adult ones, although Jody Baker, head of money at Compare the Market, said it is not surprising.
“Similar to an adult savings account, a children’s savings account can be subject to regular changes depending on a wide range of factors,” Ms Baker said.
“Over the past year, for example, there has been a lot of speculation over changes to the base rate and then we actually had a cut of 0.25 percentage points in August – both the speculation and the cut itself can have an impact on savings rates across the board.”
Ms Springall at Money-facts noted that Jisas, which first came onto the market five years ago, have “brought some decent deals” since then, but added that “now would be a good time to review any stagnant deal and consider moving the cash to something more competitive”.
“Unfortunately, as the majority of child savers pay variable rates, they are in danger of rate changes at any moment, so it’s worthwhile being diligent in checking the savings pot on a regular basis and not putting up with any paltry interest,” she added.
Perhaps surprisingly, the advice from the industry is the same, with a spokesman for the British Bankers’ Association commenting parents should shop around to stand a chance of beating the cuts on their kids’ accounts.
“The Bank of England’s base rate had remained at a record low since 2009 before being cut further in August,” the spokesman said.
“While this has been good news for borrowers it has also led to tough times for many savers.
“We always encourage customers to shop around so they get the best deal for them and their children in this low interest-rate environment.”
While keeping an eye on rates and switching accounts on a regular basis may not be top of everyone’s agenda, particularly if parents are already seeking out the best deals for their own mortgages, savings and insurance policies, Ms Baker at Compare The Market urged parents not to be put off from opening or saving into an account for their children.
“Although rates are very low at the moment, there is still a strong argument to open a savings account or children’s Isa for your child,” she said.
“By including your child in the process of opening their account it could help to increase their financial literacy and a savings discipline.”
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