Urgent warning for thousands of parents as kids miss out on £4k each due to simple error – how to avoid it

THOUSANDS of parents could be costing their children an average of £4,000 in savings in adulthood with a simple error.

A combined £3.5billion has been lost by thousands of child savers because their parents have put their money in a cash account instead of investing it, according to analysis provided exclusively to The Sun by financial firm Quilter.

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This is a huge increase on the roughly £1.2billion estimated to have been lost by picking a cash account in 2021, Quilter found.

Junior ISAs (JISAs) were launched in 2011 as a replacement to child trust funds.

The accounts allow parents and grandparents to build up savings for their kids or grandkids tax-free.

Relatives can invest £9,000 per child each year, for any kids under 18 living in the UK.

There are different types of JISAs to choose from including cash JISAs, which work like a regular cash ISA, and Junior Stocks & Shares ISAs, where you can invest the money in the stock market.

Historically, investments in Stocks & Shares ISAs have vastly outperformed savings kept in cash accounts long-term.

However, high cash savings rates in recent years have made these accounts look more attractive than in the past.

But these high rates have been driven by high inflation, meaning they aren’t really as high as they look.

High inflation decreases the real-term value of money, so any returns need to beat inflation in order to earn anything at all.

Each year, around £530million is contributed to Cash JISAs, according to the latest HM Revenue & Customs (HMRC) data.

Quilter calculated that, assuming cash returns of 2% since 2011, the value of these accounts currently stands at £5.6billion.

However, its analysis found those accounts would be worth £9billion had they had been invested in stocks and shares instead of cash – meaning young savers have missed out on a combined £3.4billion.

Based on the number of JISAs open right now, that works out at around £4,000 in savings lost per head – although the exact number of accounts open each year varies slightly.

Just under 40% of cash in JISAs is allocated to stocks and shares, which is an improvement compared to previous years, but thousands of kids are still getting far lower returns on their savings than they could.

This means by the time they come to withdraw from their accounts, they will have less cash to use than if it had been invested over the 18-year period.

Ian Futcher, financial planner at Quilter, said: “For anyone looking to use their children or grandchildren’s allowance allowance this tax year, putting this money to work should be a priority.

“Younger generations face significant financial hurdles, such as building a deposit for a house or paying for further education.

“By investing, we have an opportunity to give them a serious head start when they enter adult life – and that means avoiding the meagre returns on offer from cash products.“

As always with investing, bear in mind that your cash is at risk and you may end up with less than you put in.

Why aren’t good cash savings rates enough?

When inflation increases, interest rates are generally raised to encourage people to save instead of spend, as this helps to bring inflation back down.

As a result, banks increase the rates they will pay for putting your cash away.

But when inflation is high, prices are rising. This means you need more money to buy the same things, so the spending power of each pound is decreased.

If your money was sat in an account paying 0% interest and inflation increased by 1%, you would effectively lose money over time.

If inflation is running at 5% or higher – which it has been for much of the last year – your cash account would need to be paying the same amount just to break even.

Few cash savings accounts pay rates this high any more.

Santander is set to slash the rate on its top-paying savings account, which pays savers 5.20%. From May 20, the rate will fall to just 4.2%.

However, long-term investment accounts have generally returned far higher than this.

The FTSE 100 – an index of the largest 100 listed companies in the UK – returned investors around 7.4% between 1984 and 2022.

Mr Futcher explained: “Given interest rates have been relatively high recently due to inflation, many heads have been turned by attractive JISA cash savings rates.

“Cash continues to be king for UK savers – they perceive it as risk-free, despite inflation decreasing its real-terms value, and they choose not to face the potential volatility of the stock market even though it has historically given better returns.

“When children have such long investment horizons, investing gifted money is much more likely to build long-term financial prosperity than cash, where savers would miss out on compound growth and inflation may simply erode the real value of their savings.”

What can I do to earn my child more money?

If your child still has years left to save, it might be worth putting their savings in a Stocks & Shares JISA instead.

Most providers of JISAs will help you switch accounts or will help you transfer from a cash ISA with another firm to their investment ISA.

Just give the provider you want to move to the name of your current provider and your account number, as well as any other details they ask for, and they will do the leg work for you.

If you can, make the most of your ISA allowance every year as it means you can save money in the account without incurring any tax on the interest earned.

You could also buy N&SI premium bonds for your kids.

These are a popular way to invest as they are government-backed so there is minimal risk, and each month the cash is entered into a prize drawer with top prizes of £1million.