Big Banks’ ‘Stranglehold’ On Junior ISA Market | moneyfacts.co.uk

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Peter Sargent

Sub Editor / Proof Reader
Published: 12/01/2022
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Many parents are saving for their children’s futures by opening Junior ISAs (JISAs) for them. But it appears many of them are losing out by sticking with major high street banks, when smaller ‘challenger’ outfits are offering much better deals and returns.

Research published by the Scottish Friendly Assurance Society says three major high street banks provide 57% of all cash JISAs, based on the number of accounts, and dominate 44% of deposits in a £3.8 billion market, creating a ‘stranglehold’.

Yet the average junior cash ISA rate offered by the big three banks is just 1.4%, compared the best-paying account on the market offering up to 2.5%, according to the report. Meanwhile, many consumers are unaware they can also open a stocks and shares JISA, which can offer greater returns, albeit without the guaranteed returns of a cash JISA.

What is a JISA?

Junior ISAs offer a tax-free way for you to save for your child’s future. Once the funds are in a Junior ISA, they can only be accessed by the child when they reach the age of 18. A child can hold only one cash Junior ISA and one stocks and shares Junior ISA at the same time. Child Trust Funds can be transferred to Junior ISAs without penalty.

On maturity, a JISA will usually automatically become an adult ISA. When this happens, it is important for the owner of the account (which will be the child for whom the account was set) looks at the interest rate on the ISA and consider transferring funds to an ISA that pays a better rate.

While there are plenty of cash JISAs available, it’s worth noting that it is possible to have a stocks and shares JISA too, which may be suitable for those who don't mind taking a bit more risk for the potential of a better rate. Just remember that there’s no guarantee, and if your chosen funds do not perform well, you may end up with less than you put in.

You can find out more about JISAs by reading our guide to how to save for the future of your children.

High street banks dominate JISA market

This week’s study, carried out by Scottish Friendly and the Centre for Economics and Business Research, says 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.

Familiarity and security appear paramount. A survey of 500 junior ISA account holders found that more than one in seven (15%) of those with cash JISAs said having an established relationship with a bank or financial provider was the most important factor when choosing a provider. At the same time, for nearly two in five (38%) respondents the interest rate offered was the biggest factor.

Challenger banks and smaller providers are paying better rates than the big high street banks. With the current rate of inflation (5.1%) more than double the best-paying cash JISA, savings held in these accounts are losing value in real terms.

Considering the stocks and shares option

According to the Scottish Friendly, just 27% of all JISA holders have a stocks and shares account, compared to 86% with a cash account. Nearly a third (31%) of parents with a cash JISA only said they chose it over stocks and shares because it’s easier to manage and 27% felt that their money is more secure. More than one in five (22%) either did not know they could hold both types of junior ISA or were unsure what a stocks and shares JISA was.

The Scottish Friendly believes the big banks’ “stranglehold” on the market is contributing to a lack of awareness and understanding of stocks and shares junior ISAs.

Jill Mackay, Marketing Director at Scottish Friendly, said: “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.

“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, for example, is 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.”

How to choose a Junior ISA

Check out the latest and best paying JISA accounts by comparing our charts.

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