Parents saving for their kids prioritise the familiarity of high street banks over the opportunity to potentially secure higher returns elsewhere

• Three of the UK’s biggest banks hold a dominant 57% share of the junior cash ISA market based on number of account holders and have 44% of all deposits
• The average junior cash ISA rate offered by the big three banks is just 1.4% whereas the best-paying account on the market offer 2.5%
• Scottish Friendly warns that the big banks’ stranglehold on the junior cash ISA market is contributing to a lack of awareness and understanding of stocks and shares junior ISAs

Parents saving for their children’s future favour junior cash ISAs provided by the UK’s biggest banks despite the potential to earn higher returns elsewhere, according to a study by Scottish Friendly and the Centre for Economics and Business Research (Cebr).

However, the average cash JISA rate offered by the ‘big three’ is just 1.4%, whereas challenger banks and smaller providers are paying as much as 2.5%.

Plus, with the current rate of inflation (5.1%) more than double the best paying cash JISA, savings held in these accounts will be losing value in real terms.

The survey of 500 junior ISA account holders found that more than one in seven (15%) respondents with cash JISAs said having an established relationship with a bank or financial provider was the most important factor when choosing a provider.

This partly explains why the junior cash ISA market is so heavily concentrated, but for nearly two in five (38%) respondents the interest rate offered was the biggest factor.

The study also found that inflation is taking a toll on Brits’ savings and investments, with more than half (60%) expressing concerns that they’ll have to pause or reduce their regular savings and/or investments to accommodate the rising cost of living.

This bodes the question why more parents don’t consider investing in a stocks and shares JISA which offers the potential for above-inflation returns.

A little over a quarter (27%) of all JISA holders have a stocks and shares account compared to 86% who have a cash account.

Nearly a third (31%) of parents with a cash JISA only said they chose it over a stocks and shares because it’s easier to manage and 27% felt that their money is more secure.

But more than one in five (22%) cash JISA holders either did not know they could hold both types of junior ISA or were unsure what a stocks and shares JISA was. This suggests a lack of awareness may be preventing some parents from maximising their children’s savings.

In contrast, when asked why people chose to invest in a stocks and shares JISA over a cash JISA, the most common reason given was the expectation of higher returns (27%).

The study also found the market for stocks and shares JISAs is far more diluted than with cash JISAs.

Only one provider has more than 10% of account holders and the three biggest players have a market share of just 34%, compared to the 57% held by the three largest cash JISA providers.

Jill Mackay Marketing Director at Scottish Friendly, comments:

The stranglehold that the big banks have on the junior cash ISA market means that many parents aren’t taking advantage of better rates found elsewhere.

But worst than that, the leading junior cash ISA providers are also complicit in failing to encourage people saving for their children’s future to consider investing some of their money into the stock market.

The current rate of inflation is already well above the best rate of interest available on any cash junior ISA and this gap is set to widen in the coming months as prices continue to rise.

The only way to have a chance of achieving inflation beating returns is to take advantage of the growth potential of the stock market.

One way of doing this is, for example, via a stocks and shares junior ISA. As a parent, if you need easy access to your cash or if you are saving for the short-term then a stocks and shares junior ISA might not be right for you and your child, but if your child is young, then it is worth considering as the money can only be accessed when they reach 18.

Plus, there is no reason why you can’t hold both if you don’t want to put all your eggs in one basket. Disregarding a stocks and shares junior ISA because your bank doesn’t offer one could limit the sum of money you pass on to your child in the future. Of course, stock market investments can go down as well as up and your child could get back less than you pay in.