How to better protect your children’s Christmas cash from this financial Grinch

How to better protect your children’s Christmas cash from this financial Grinch

As the festive season approaches, there is a host of Christmas films to enjoy with your children. From Charles Dickens’ A Christmas Carol to Home Alone, there are plenty of festive blockbusters to choose from.

Another regular at the festive season is The Grinch, starring Hollywood’s Jim Carrey. You may already know that the film tells the Dr Seuss story of a grouchy creature who tries to ruin Christmas by stealing gifts and decorations from the homes in the nearby town of Whoville.

While it’s an entertaining story, there may be a real-life financial Grinch waiting to strike at any cash your children receive this festive period. Otherwise known as “inflation”, it could devalue their money in real terms.

Read on to discover why this is, and how a financial planner could help protect your children’s money.

Putting your child’s Christmas money into a JISA makes sense

Many parents and grandparents want to help the younger generations of their family financially, whether that’s to fund a university education or to get on to the property ladder.

This is demonstrated by recent research by the Association of Investment Companies (AIC), which reveals that two-thirds of parents plan to help their children financially in the future.

If your child receives sizeable amounts of money this Christmas, a shrewd move might be to place it into a Junior ISA (JISA). Like adult ISAs, they are tax-efficient as any future withdrawal will typically not be liable to Income Tax, and any growth the ISA enjoys is usually not subject to Capital Gains Tax.

In each of the 2021/22 and 2022/23 tax years you can put up to £9,000 into a JISA, which means you could build a significant pot of money to help your offspring in a relatively short time. Small surprise that a recent article by Your Money reveals the number of JISA accounts has increased every year since they were first introduced in 2011, reaching 706,000 in 2019/2020.

While opening a JISA can be a tax-efficient way to save for your child or grandchild, many savers choose to leave the money in a cash account – and this might not be the best long-term option.

Cash is not always king

According to recent data by AIC, 60% of parents who use JISAs to put money aside for their children use a cash version rather than investing the money. Research from Your Money suggests that this might not be the most profitable option, and that savers who used Cash JISAs could have missed out on around £13.5 billion in potential returns over the past decade.

The research shows that Cash JISA holders who contributed the maximum for each of the last 10 years would have £52,200 in their account after depositing a total of £44,800.

While that may sound impressive, Your Money explains that if the same person had invested into a Stocks and Shares JISA, they could have £84,500 in the pot (based on returns from the MSCI World Index – a basket of more than 1,500 shares from developed countries). That’s £32,300 more.

It’s a sobering thought, especially when you also consider the impact inflation could have on your children’s cash savings.

Inflation could reduce your child’s Cash JISA in real terms.

As inflation is the increase in the price of goods and services, it has the potential to devalue your children’s money in real terms. This is because £1 in the future is likely to buy you less than it does today.

If you use an inflation calculator, you can see that today you would need £130 to have the same spending power as £100 in 2011. This means your money would have had to effectively grown 30% in the period to keep up with inflation, which averaged 2.7% in the 10 years.

As This is Money reveals that the best Cash JISA paid 2.5% in October 2021, this might be unlikely. Furthermore, the Office for Budget Responsibility has warned inflation could reach nearly 5% in 2022 – around twice the Cash ISA rate highlighted by This is Money.

As a result, your child’s cash could reduce in real term value.

A Stocks and Shares JISA could inflation-proof your child’s Christmas cash

As you can see, investing in a Stocks and Shares JISA could provide greater potential growth that could shield your children’s money from inflation. That said, investing should never be entered into lightly and should typically be seen as a long-term venture of no less than five years.

Speaking with a financial planner could provide peace of mind that investing is the right thing for you and your children. This is because they will consider your wider wealth and financial situation, tax implications, your attitude to risk and the type of funds the money will be invested into.

Get in touch

So, if you want your children’s money to escape the clutches of the inflation Grinch this year, talk to us by calling 0800 434 6337.

Please note:

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and your financial circumstances.