I strongly suspect that my daughter – who received her A-level results this week – has no idea who Gordon Brown is. I suspect that most of her class don’t either. But I think many of them will want to thank him in the coming months for launching a savings scheme for children called the Child Trust Fund (CTF) when he was headmaster.
All children born during my daughter’s school year were entitled to a £250 bonus, which parents could invest in shares or a cash account. They received another £250 when the child turned seven. Children from low-income families received higher amounts, and the scheme encouraged family members to contribute up to £1,200 a year.
In 2011, the scheme was closed to new participants, but its legacy lives on in the form of Junior Isaa tax wrapper that does not include government vouchers, but with higher annual savings or investment limits (up to £9000 tax-free in the current tax year). Many CTFs, like my daughter’s, were converted into a Junior ISA.
We contributed over the years so that after she turned 18 and finished her high school studies, she was in a fortunate position for whatever she decided to do next. Although not as fortunate as others, apparently.
The top UK Junior ISA investors have amassed funds of more than £750,000, according to a new Freedom of Information request. The top 50 children have an average fund of £761,000, meaning they can expect to become millionaires by the age of 20, according to wealth manager RBC Brewin Dolphin, which requested the data from HM Revenue & Customs.
More than 370 have pots worth more than £200,000, up from 40 last year. And the number with more than £100,000 in their pot has more than tripled in a year to 1,910.
How do you arrive at those sums? To turn the 17 years of maximum contributions (plus the £500 government CTF) – totalling £63,436 – into £761,100 would have required annualised returns of just under 32 per cent over the period, says RBC Brewin Dolphin. Who is managing these guys’ investments, Warren Buffett?
Their parents may have been professionals, muses investment manager Rob Burgeman. Still, this must have involved a high-risk strategy: perhaps investing in a high-growth stock, such as Nvidia. Even with some of the tech giants, such as Microsoft or Amazon, you would have had to trade frequently, timing the markets correctly, to get that result.
Or perhaps their parents worked for or founded small AIM-listed companies, and had the confidence to back the business (within insider trading rules, of course).
Whatever the reason, Burgeman says: “This kind of accelerated growth simply cannot be generated through cash savings by patients.” No joke: over the same time period, the same contributions to a cash Jisa would have grown to £66,000.
Fortunately, I can tell my daughter that we didn’t leave the money in cash, where the money would have struggled to outpace inflation. But, come down to it, I probably could have invested better: we opted for a benchmark product because I didn’t want to risk a below-average return. In retrospect, I think I was too cautious. But I’d also like her to learn that, when it comes to long-term investing, compound interest means mediocrity isn’t a bad thing to aim for.
At least we didn’t leave the money in an inherited CTF product, where it could have continued to accrue 1.5 per cent annual fees, reducing returns. Or lost it altogether. There is an estimated £1.7bn in unclaimed CTFs, with providers saying families have moved away and can’t be traced. I’ve told my daughter: friends can check if they have CTF money using their national insurance numbers and the government website.
Of course, parents and grandparents were already investing in their children long before the CTF was set up, but what the CTF did was ensure that the money belonged entirely to the child once they turned 18, hence the reason for thanking the former member for Kirkcaldy and Cowdenbeath.
My daughter’s money has already been transferred to an adult Isa, which is worth enough to be a substantial help towards paying university fees. But if she wants to spend it all on interrailing or learning to fly a plane, then she is entitled to do so.
Ideally, he would continue to invest. He could keep it in the variable investment fund and withdraw it gradually, so that he gets used to the ups and downs of the stock market.
I would also like you to learn about the different types of investments. Interactive Investor, an investment platform, found that mature junior ISAs have a slightly higher weighting in unit trusts and exchange-traded products, which are good sectors to explore.
You could even have fun looking for opportunities to invest small amounts in different stocks – most likely in brands you already know: JD Wetherspoon It’s not a bad scream.
Jisa’s rich kids may have won the investment lottery, but funds of much more modest means can still encourage young people to practice modest portfolio customization, laying the groundwork for them to plan their financial future with confidence.
This is worth as much as a college degree in itself.
Moira O’Neill is a freelance finance and investment writer. moira o’neill@ft.com, UNKNOWN: @MoiraONeillInstagram @MoiraOnMoney