Why are Isas earning worse for children than adults?

All four of my grandchildren have cash-based Junior Isaas. These are fixed so the child cannot access them until she is 18.

What puzzles me is that Junior Isas’ savings rate hasn’t kept up with the overall savings industry’s rise. For example, his 3-year fixed rate Isa on Virgin pays him 4.35% interest, while the best Junior Isa Isa he can find is only 3.10%.

Surely kid Isas should offer higher interest rates? SR Hull, Humberside

A helping hand: Virgin’s 3-year fixed rate Isa pays 4.35% interest, while the best Junior Isa I can find is only 3.10%.

Ruth Jackson-Kirby replied: I found an anomaly in the savings market. Traditionally, children’s savings accounts have paid higher interest rates than adult accounts. He has two reasons.

First, banks know that getting younger customers is a good idea. So it makes sense to catch them early. Second, there are often limits on how much you can deposit, so providers can afford to offer more generous rates.

Still, it’s all change. Adult cash Isas enjoys rising interest rates, but children’s accounts have been overlooked.

The highest junior cash Isa rate offered two years ago before the Bank of England considered raising rates was 2.5%, according to data from Savings Champion, which tracks rates. In contrast, the highest rate an adult could get on cash Isa was 1.51% for him, and he had to tie up the money for five years to get this.

Today things are very different. Ages 18 and up can enjoy 4.35% annual interest on her 3-year fixed interest cash Isa from Virgin Money. However, the highest rate offered at Junior Isa is 3.1% from the building associations Coventry and Cumberland, although the latter is for local customers only.

Anna Bowes, co-founder of Interest Rate Scrutiny Savings Champions, said: Your grandson won’t have access to Junior Isas until she turns 18, but her parents can move their account to another provider.

She adds:

Therefore, in terms of increasing returns for their grandchildren, encourage parents to monitor Junior Isa interest rates closely and be prepared to change plans should a better interest rate become available.

Also note that all your grandchildren can have two Junior ISAs. Total deposits to the account cannot exceed his annual cap of £9,000. Over 70% of junior ISAs are cash accounts, but an investment ISA may be a better idea.

Laura Suter, Head of Personal Finance at Wealth Manager AJ Bell said: Investment risk can be a bit higher as it will take longer to ride out market ups and downs. For example, in today’s volatile markets, knowing that you won’t need your money in the next 10 or 15 years will probably make you more calm as an investor.

AJ Bell data shows that investment Isa can generate much higher returns than cash Isa. A person who saves £50 a month for investments could have built a pot worth £17,700 by the time the child turned her 18. In contrast, the same amount of cash that Isa earns 2% a year will be £5,000 less for him after 18 years.

Suter says: A parent whose child started when she was 10 years old said that by investing £100 a month she could generate a pot worth £12,000 on her 18th birthday, saving in cash. She makes 10,500 pounds. This is based on an average return on investment of 5%.

You should discuss your child’s familiarity with investing as they will need to open an account for their grandchildren.

Junior Isa interest rates may be disappointing right now, but it’s not worth looking at a simple kid’s savings account.

Interest rates are marginally high, with 3.25% being the highest rate available through HSBC (MySavings account). If the child earns more than £100 in interest annually, it will be taxed at the parent’s income tax rate.