Junior stocks and shares ISAs beat cash ISAs – should you invest for your child?

Many families start saving for their child’s future from the moment they are born. A junior ISA can be a good vehicle for this. You can stash up to £9,000 per year in the tax-free account, either putting it in cash or stocks and shares.

The latest HMRC data shows 1.2 million junior ISAs were opened in 2022/23. The majority (61%) of subscriptions were for junior cash ISAs, while 39% opened a stocks and shares junior ISA.

Coupled with analysis that shows stocks and shares generally outperform cash over the long term, provided they are suitably diversified, this suggests families could be losing out on potential returns by playing it safe.

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If you put £9,000 in a junior cash ISA 18 years ago, it would be worth just £7,453 today when adjusted for inflation, according to analysis from the Investment Association (IA).

The same amount would have grown to £20,802 in real terms, if invested in a typical global equity fund via a junior stocks and shares ISA, the IA said. They used the IA global sector average to arrive at this calculation.

The difference is a whopping £13,349 over an 18-year time horizon. It suggests if cash was ever king, its crown slipped long ago.

“Many parents are already taking advantage of junior ISAs, but we would like to see more benefit from long-term investment through the junior stocks and shares ISA,” said Chris Cummings, IA chief executive.

The Investment Association is calling on the government to introduce more effective financial education so that concepts like compound growth and inflation risk are better understood.

What is a junior ISA?

A junior ISA is a tax-efficient wrapper for saving and investing on behalf of a child. You can deposit up to £9,000 each tax year, holding it in cash or investing it in the stock market. Any income and capital gains are shielded from the taxman.

A junior ISA legally belongs to the child, so it won’t eat into your £20,000 ISA allowance each tax year (the limit for adults). The child is free to access the funds as soon as they turn 18.

It is important to instil good financial habits from an early age so the child uses the money responsibly once they are able to access it – for example, using it to help with university costs or as a deposit on a first home.

Leaving the money invested to grow further is often one of the best options, depending on your immediate circumstances.

Of course, junior ISAs aren’t the right option for everyone. For example, families that don’t have enough leftover cash at the end of each month to top up their emergency fund or their own ISA should consider that first.

However, they can be a great way to set your child up for the future, and can help you safeguard more money from the taxman.

Junior ISA: stocks and shares versus cash

Cash is essential for short-term savings goals and emergencies, but investing sensibly in a diversified pot of investments is often considered the best way to build long-term wealth. We look at the pros and cons of both options in our “saving versus investing” guide.

Investment markets are more volatile in the short term, but taking a long-term view can help you smooth out the bumps and hopefully beat inflation by a meaningful margin. A minimum of around five years is typically recommended.

A stocks and shares account may be well suited to a baby or child, as they have an 18-year time horizon ahead of them before they can even think about touching the account.

The S&P 500 might have taken a beating in recent days in response to US president Donald Trump’s tariffs, but it is still up more than 250% over the past 18 years. The FTSE All World, a global stock market index, is up around 100% over the same period. Of course, past performance is not indicative of future returns, but the figures provide food for thought.

The power of investment markets is further illustrated by looking at how junior ISA wealth is booming.

Wealth management firm Brewin Dolphin put in a Freedom of Information request to HMRC last year, and found that 370 of the top junior ISA investors had pots worth more than £200,000 in the 2021/22 tax year.

Fifty children had over half a million in their junior ISA, with the average pot in this bracket coming to £761,100.

These figures would have been impossible to achieve through a cash ISA alone, even if parents paid in the maximum amount every year.

Brewin Dolphin calculated that, even if you had maxed out the annual allowance every year for 17 years, you would still have had to achieve an annual return of nearly 32% to build a pot worth £761,100.

It is worth pointing out that the junior ISA allowance has changed over time, rising from £3,600 when they were first launched in 2011 to £9,000 today.