The government wants you to save more. You might think that odd for two reasons. First because, if you are an average person, you are unlikely to have much extra to save. Sure your mortgage payments are lower than they were but what the financial crisis has given you with one hand, it is firmly ripping away with the other: high inflation is destroying the purchasing power of your net income.
And second because, 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 is no accounting for the madness of state policy and so it is that, from November, you will be able to open a Junior Isa 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 – will then come tax-free.
So, 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 (CTFs) and I never put a penny into them. It isn’t that I’m not concerned about their futures. I am. It is just that, right now, I value my own financial security over their future financial security and I suspect that if they were up to thinking about it, they would too. When they are 30 or 40 and in the middle of being buried under the expense of their own careers, mortgages, children’s music lessons 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 just 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 that isn’t you and 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 they can help themselves to the cash when they turn 18 should they want to. You might think you are saving towards those nasty university tuitions fees, but what if your child withdraws the money for something else all together? 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 all make the JISA completely useless. Most children are surrounded by relatives and godparents who like to chuck a bit of 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 1970s, final salary pension etc.) and trying to get rid of cash in order to cut their heirs’ inheritance tax bill, it might be that a £3,600 a year tax free allowance is more than welcome. So what should you arrange for your child to invest his grandparent’s money in?
The first thing to say is that, whatever it is, there is a strong chance that it will disappoint. The vast majority of advisers and fund managers persist in believing that, with the rare exception of a few times of crisis, stock markets on average return something in the region of 8-10% a year after inflation. This is an extraordinary triumph of recency bias over reality. Between 1980 and 1999, markets returned 8-10% a year in real terms. But mostly they return more like nothing. According to Tim Price of PFP Management if you start in 1700 and look at each 20-year period from then, you will find that 1980-1999 is, in fact, the only period in which stocks have made such a return. In two of the periods they made -6 to-4%.
In five, they made -2-0%. In three they made 0-2% and in four, they made 2-4%. None of the calculations the providers of JISAs will be bandying about over the next few months to show you how rich your children will be if you give them all your money will take this into account (they’ll all assume returns of 6-7% a year). But you should.
On the plus side, the fact that most children will turn 18 not much richer than they are now doesn’t mean yours have too. Long-term stock market returns are very much a function of buying things when they are cheap, selling them when they are not and paying the lowest possible fee to do so (it sounds obvious I know, but to most fund managers, it really 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 that gets the basics and covers everything. At the moment, I can think of three that meet the criteria: Personal Assets Trust, RIT Capital Partners and British Empire Securities & General Trust.
• This article was first published in the Spectator on 15 October 2011.