More than a third of parents (34%) are using current accounts that pay almost zero interest to save for their children’s future, new research from financial mutual Scottish Friendly reveals.
Despite the average current account paying just 0.15% interest, they have emerged as the second most popular method of saving among parents, the data shows.
Interest rates have remained at a record low during the pandemic but current accounts and bank or building societies savings accounts have been the two most popular options over the past year (see table below).
By leaving their money in a current account, parents are potentially missing out on thousands of pounds over the course of their children’s childhoods.
For example, parents saving £100 a month into a current account paying 0.15% would accrue just £292.86 in interest after 18 years and would be left with £21,892.86 in total.
If, though, the same parents had invested their money in a fund tracking the FTSE 100, they would have made £8,165.31 profit and would be left with a total pot worth £29,765.31 before investment fees .
The study of more than 1,200 parents and grandparents found that 40% have increased the amount they save in cash for their children over the past 12 months.
However, there has also been significant investment into stocks and shares by parents during this time. One in five (20%) have saved into a stocks and shares junior ISA and over two thirds (64%) of them intend to increase what they invest into it for their kids during the next 12 months.
Nearly half (46%) of all parents surveyed have invested in some form for their children since the pandemic began.
Plus, when asked whether they had invested more money in the past 12 months compared to previous years, almost half (47%) said they had compared to just 12% who said they had invested less.
The biggest reason for this was the fact that there had been fewer spending opportunities over the past year, according to 45% of parents.
But more than four in ten (41%) said the greatest factor was their motivation to build up a savings buffer for their kids as economic uncertainty surrounding the pandemic grew.
Jill Mackay, savings and investment specialist at Scottish Friendly says:
The current combination of rising inflation and record low interest rates mean people saving in cash are committing themselves to losses.
The dependency on cash and current accounts in particular is based on inertia and the convenience of knowing you don’t have to move your money. But if a current account or savings account is offering you less than the current rate of inflation, which the majority are, then the value of your cash savings is reducing every day.
The easiest way to protect some of your cash from the threat of rising inflation is to diversify your savings and investments.
When it comes to children’s savings, this can be done simply through a junior stocks and shares ISA which will give you access to multiple assets that offer greater growth potential in the current climate.”
1. Monthly average of UK resident banks’ sterling weighted average interest rate – interest bearing current account deposits from individuals and individual trusts, Bank of England.
2. FTSE 100 annual return 01/04/03 to 01/04/21: 3.41%
Remember that the value of investments can go down as well as up and you could get back less than you paid in.
Tax treatment depends on individual circumstances which can change in the future.