Junior Isa or Child Trust Fund: Which is best for parents saving for the future?

Sarah Coles explains how to get the best deal when saving for children, and which funds and stocks are most popular among parents

Sarah Coles is an award-winning money expert and head of personal finance at stockbroker Hargreaves Lansdown.

The nest eggs we’re saving for our children risk ending up so small that they’re devoured overnight, rather than building to something they can dine out on over the years to come.

We’re working hard to put something aside to give them a head start in life, and yet we’re making two common mistakes that are holding back growth.

Are you using the wrong type of account? 

There’s a real risk you’re holding the wrong account for your child.

Those who were born between 1 September 2002 and 1 January 2011 automatically received a Child Trust Fund, and there’s far more money in these than there is in Junior Isas.

Some parents have forgotten these accounts completely – there’s more money left languishing in matured Child Trust Funds than has been withdrawn or transferred.

Other parents feel like it’s an easy option for saving: you already have the account, so you may as well make use of it.

However, CTFs have less to offer than Junior Isas, and you can now switch from one to the other.

> What funds and stocks do other parents pick for children? Scroll down to find out

The two accounts have the same tax benefits; the annual limit is the same; the money is still locked away until the age of 18; and it will belong to the child at that stage.

However, if you keep your money in cash you can get a better rate in a Junior Isa. The best Junior Isa on the market is currently 5.39 per cent. 

If you’re in an investment CTF, you may be paying over the odds in charges.

You can get an equivalent tracker fund, which clones performance of a major stock market index, for a fraction of the cost in a Junior Isa.

And some investment companies – including Hargreaves Lansdown – don’t charge Junior Isa clients a fee for holding funds or shares.

Are you in the right Junior Isa?

Even those who opened a Junior Isa are more likely to have opted for a cash than a stocks and shares one – only 43 per cent of Junior Isa money is in stocks and shares.

Cash is sometimes the right option – for example, if the child is an older teenager.

However, for younger children, when you’re putting money aside for up to 18 years, you really should consider investments. It offers far more potential growth than cash over this kind of timeframe.

Parents may be wary of investments, because they’re worried about the risk of losses. It’s hardly surprising, because when markets fall sharply it makes headlines, whereas when they rise over the long term nobody notices.

It means we can overestimate the risk of market falls. And at the same time, we may underestimate the risk that money in a cash Junior Isa doesn’t keep pace with inflation.

Investing your Junior Isa has benefits beyond the potential growth too.

If you talk to your child about their investments, they can build their understanding and interest in it. And they never need to worry about whether they’re the kind of person who invests, because they already do.

> How do Junior Isas work? Read our guide 

Where are other parents investing? 

Take a sneak peek at the most popular funds and stocks chosen for children via DIY investing site Hargreaves Lansdown

Top 20 most popular Junior Isa funds (alphabetically)

Baillie Gifford American

Baillie Gifford Managed

BNY Mellon Global Income

Fidelity Index World

Fundsmith Equity

HSBC FTSE 250 Index

IFSL Marlborough UK Micro-Cap Growth

JPMorgan Emerging Markets

Legal & General Global Technology Index Trust

Legal & General International Index Trust

Legal & General UK 100 Index Trust

Legal & General UK Index

Legal & General US Index

LF Lindsell Train UK Equity

Lindsell Train Global Equity

Rathbone Global Opportunities

Stewart Inv Asia Pacific Leaders Sustainability

Vanguard LifeStrategy 100% Equity

Vanguard LifeStrategy 80% Equity

Vanguard US Equity Index

Top 20 most popular Junior Isa shares (alphabetically)

Alphabet, Amazon.com, Apple, Aviva, Barclays, Berkshire Hathaway, BP, Glencore, GSK, HSBC Holdings, International Consolidated Airlines Group, Legal & General Group, Lloyds Banking Group, Microsoft, Rio Tinto, Rolls Royce Holdings, Shell, Tesla, Unilever, Vodafone Group.

Source: Hargreaves Lansdown, July 2023

This post first appeared on Dailymail.co.uk