The government wants you to save more. You might think that odd for two reasons. First, because if you are an average person you’re unlikely to have much extra to save; your mortgage payments may be lower than they were, but what the financial crisis has given you with one hand it is ripping away with the other. High inflation is destroying the purchasing power of your net income.
Secondly, if you watch the news at all you will know about the paradox of thrift. If we all start saving at once our horribly ill-balanced, consumption-based economy won’t be able to cope: economic growth will continue to collapse and we will all end up worse off. Still, there’s no accounting for the madness of government policy and so it is that from November you will be able to open a Junior Isa (Jisa) for your children (if they don’t already have a child trust fund) and pile whatever pennies you can scrabble out of your purse at the end of every month into it, up to a limit of £3,600 a year. The returns, both capital gain and income, come tax-free.
Should you start putting money into one of these things for your children? I bet you think this is a rhetorical question, but it isn’t. My children have child trust funds and I never put a penny into them. It isn’t that I’m unconcerned about their futures. I am. It’s just that right now I value my own financial security over their future financial security, and I suspect that if they were capable of thinking about it they would too. When they are 30 or 40 and buried under the expense of mortgages and school fees, will they really want to get a call from me saying I’m a bit short on the month’s nursing-home fees because I put too much into their Jisas when they were three? Odds are they’ll curse the Jisa, and me.
The fact is that very few people in the UK have enough money saved. Their pension provision is generally pathetic; their ISAs aren’t used in full every year; their tax allowances are under-exploited and their emergency savings accounts are more often than not almost entirely empty. If that sounds like you, you can safely ignore all exhortations from the press to invest in a Jisa. You can’t afford it. Instead, you need to focus on getting your own house in order.
If you can afford it, you might also want to think about one more thing before you call your broker. Just because you put the money into a Jisa doesn’t make it your money. The second it enters the tax-free wrapper it becomes your child’s money. So not only can you not take it back for any reason but they get full control of it when they turn 16 and if they so choose they can help themselves to the cash when they turn 18. You might think you are saving towards those nasty university tuition fees, but what if your child withdraws the money for some other purpose altogether? Most traditional methods by which parents save for their children allow them to ration access. The Jisa does not. Yet another reason to fill your own Isa first.
Still this doesn’t make the Jisa completely useless. Most children are surrounded by relatives and godparents who like to chuck cash at them every now and then. And if they have the kind of grandparents typical of the lucky generation (large house bought cheap in the 1960s or ’70s, final salary pension, cash to get rid of in order to cut their heirs’ inheritance tax bill) it might be that a £3,600 annual tax-free allowance is more than welcome. So where should you arrange for your child to invest his grandparents’ money?
The first thing to say is that whatever you pick, there’s a strong chance it will disappoint. The vast majority of advisers and fund managers persist in believing that apart from rare periods of crisis, stock markets on average return in the region of 8-10 per cent per annum after inflation. This is an extraordinary triumph over reality of what psychologists call ‘recency bias’. Between 1980 and 1999 markets returned 8-10 per cent annually in real terms, but mostly they return closer to nothing. According to Tim Price of PFP Management, who writes on page 32, if you look at every 20-year period since 1700, you’ll find that 1980-1999 was in fact the only period in which stocks made such an ample return. In seven of the periods they made negative or zero returns, and in seven more they made no better than 4 per cent.
Calculations bandied about by providers of Jisas are unlikely to take this analysis into account: they’ll probably assume returns of 6-7 per cent per year. But you should — and look on the bright side: the fact that most children will turn 18 not much richer than they are now doesn’t mean yours have to. Long-term stock market returns are very much a function of buying when things are cheap, selling them when they’re not and paying the lowest possible fee to do so; it sounds obvious, I know, but to most fund managers it isn’t. You don’t want individual stocks (too much work) and you don’t want just equities (too risky). What you do want is a good generalist investment trust with an intelligent manager who gets the basics and covers everything. At the moment I can think of three that meet these criteria: Personal Assets Trust, RIT Capital Partners and British Empire Securities & General Trust.
Merryn Somerset Webb is editor-in-chief of MoneyWeek.