Stocks and shares or cash Junior ISA: which suits your child?

When you open a Junior ISA, you choose between cash and stocks and shares (or have one of each). Over 18 years, that choice can make a difference of thousands of pounds.

Here's what each type does, some worked numbers, and when each one makes sense.

The short answer: when the money can stay put for 10 years or more, stocks and shares have historically grown much more than cash. When it will be needed within a few years, cash is the steadier home for it.

Try our Junior ISA calculator to see what different amounts could become.

What's the difference?

Cash Junior ISA

A cash Junior ISA works like a savings account:

How it works:

• The money earns interest
• The rate moves up and down with interest rates generally
• The amount you put in doesn't fall
• Savings are protected up to the Financial Services Compensation Scheme limit if the bank fails

Suits:

• Money that will be needed within about five years
• Families who would rather not see the balance go down at all

Stocks and shares Junior ISA

A stocks and shares Junior ISA invests the money:

How it works:

• The money goes into funds, shares, bonds or investment trusts
• The value goes up and down, sometimes sharply, and can fall below what went in
• Over long periods, shares have historically grown faster than cash
• Nothing is guaranteed

Suits:

• Money that can stay invested for 10 years or more
• Families comfortable with ups and downs along the way

Some numbers

These use 3% a year for cash and 6% a year for stocks and shares. Both are illustrations: cash rates change, investment returns go up and down, and nothing is guaranteed.

£100 a month from birth to 18

Cash Junior ISA at 3% a year:

• Paid in: £21,600
• Could be worth at 18: about £28,500
• Growth: about £7,000

Stocks and shares Junior ISA at 6% a year:

• Paid in: £21,600
• Could be worth at 18: about £38,300
• Growth: about £16,700
• About £9,700 more than cash

A one-off £5,000 at birth

Cash at 3% for 18 years:

• Could be worth about £8,500

Stocks and shares at 6% for 18 years:

• Could be worth about £14,300
• About £5,800 more

The longer the money has to grow, the wider the gap tends to get.

Why the gap grows over time

1. Growth builds on growth

Cash and investments both compound: what you've earned earns more. The difference is the rate. Over 18 years, a few percentage points a year adds up to a big gap.

Read more about explaining compound interest to children

2. Prices rise

Prices tend to rise every year. Money earning less than that is quietly losing buying power. Over long periods, cash interest has often only just kept pace with rising prices, while a spread of shares has usually done better. For example, if prices rise by 2.5% a year, the £38,300 above would buy about what £24,500 buys today, and the £28,500 in cash about what £18,300 does.

3. Time

Children have plenty of time. With 18 years, there's room for the ups and downs of the markets to even out. Shares have fallen sharply many times, and have recovered each time in the past, but some recoveries have taken years. History is a guide, not a promise.

"But what about the risk?"

Watching your child's savings drop by 20% in a bad year is uncomfortable. It's worth understanding what the risk really is.

How long you have matters most

If your child is 15 and the money is needed at 18:

• A fall just before 18 might not have time to recover
• Cash is the steadier choice for short time frames

If your child is a baby and you have 18 years:

• The money will go through several ups and downs
• Short-term falls matter much less
• Past data has strongly favoured shares over periods this long

Ups and downs versus losing money

• Ups and downs are the value moving around. Uncomfortable, but usually temporary for a wide spread of investments held for many years.
• Losing money for good is more likely if you sell after a fall, or hold only a few companies.

For long time frames, the quieter risk is cash growing too slowly to keep up with rising prices.

When cash makes sense

18 isn't a finishing line

First, a point that's easy to miss: your child doesn't have to take the money out at 18. The Junior ISA becomes an adult ISA, and the money can stay invested, tax-free, for as long as they like.

Money that might stay invested well beyond 18 has an even longer time frame than it looks.

With that in mind, cash can make sense when:

1. There's a known need soon

If your child will need the money at 18 for something specific (university costs, a first home, starting a business) and there are fewer than about five years to go, cash protects against a fall just when the money is needed.

If there are more years to go, many families stay invested for longer and move towards cash as 18 gets closer.

2. The ups and downs would really worry you

If a fall would lead you to sell in a panic, cash may suit you better than investments you'd abandon at the worst moment.

3. It's one part of a bigger plan

Some families hold a cash Junior ISA alongside a stocks and shares one, or alongside a Junior SIPP.

Mixing the two

You don't have to choose just one. A child can have one cash and one stocks and shares Junior ISA at the same time, as long as the total paid in stays within £9,000 a year.

Split it

• Most in stocks and shares, some in cash
• More growth potential, with a steady part

Move towards cash as 18 approaches (only if the money is needed at 18)

• Younger years: mostly stocks and shares
• Early teens: gradually move some to cash
• Last couple of years: mostly cash

This is how many pension funds work, reducing ups and downs as the date gets close.

If the money isn't needed at 18, many families keep it invested throughout, because it may carry on growing for years after.

Use different accounts

• A stocks and shares Junior ISA for long-term growth
• A Junior SIPP for the very long term, with the 25% top-up
• Cash for anything needed soon

Compare Junior ISAs and Junior SIPPs

What to hold in a stocks and shares Junior ISA

Low-cost index funds

Index funds follow a whole market rather than picking individual companies. For most families, they're the simplest choice.

Why they're popular:

• Your money is spread across hundreds or thousands of companies
• Low charges (often 0.1% to 0.3% a year)
• Little to manage

Common options:

• Global index funds (companies around the world): a good all-in-one choice for many families
• UK index funds, such as a FTSE All-Share tracker
• US index funds, such as an S&P 500 tracker (just one country, so less spread out than a global fund)

Our guide to index funds for Junior ISAs goes into more detail. Squids-In is independent, and we don't earn anything from any fund or provider.

Active funds

A fund manager picks investments they hope will beat the market.

The case for:

• A professional makes the choices
• A chance of beating the market

The case against:

• Higher charges (often 0.7% to 1% a year or more)
• Most active funds do worse than a matching index fund over long periods, once charges are taken off
• Those charges come out every year, whatever happens

Choosing a provider

When comparing providers, look at:

1. Charges. Over 18 years, they matter a lot.
2. Fund choice, especially for stocks and shares.
3. Ease of use, for you and later for your child.
4. Minimum payments. Many accept from £25 a month, some less.

Our Junior ISA providers guide compares some of the main platforms.

Switching types

You can move a Junior ISA from cash to stocks and shares, or the other way round.

Worth knowing:

• Ask the new provider to arrange the transfer. Don't take the money out yourself, as it can't be taken out before 18 anyway
• A transfer doesn't use up any of the £9,000 allowance
• It usually takes a few weeks

When families switch:

• Cash to stocks and shares: when they realise the money won't be needed for many years
• Stocks and shares to cash: when a known need is close, to protect what's been built up

Involving your child

Whichever type you choose, bring your child along:

Younger children (7-10):

• Show them the statement and point out that the number has grown
• Use pictures, like seeds growing into trees
• Talk about how waiting helps money grow

Older children (11-14):

• Explain compound interest and why time matters
• Show them how markets have gone up and down in the past
• Talk about why short-term drops matter less over long time frames

Teenagers (15-17):

• From 16 they can take control of their Junior ISA, so involve them in how it's invested
• Talk about spreading risk
• Help them see that 18 is when the money becomes theirs, not a date they have to spend it by
• Talk through what they might do with it

Squids-In can help. It teaches children how money grows through 130 short lessons, and the Island Market, a game where they invest pretend money in made-up companies and see how their picks do against a steady fund. Parents can keep the family's real accounts in the app too. Ask to join the family beta.

Common mistakes

1. Picking cash "because it's safer" for money that won't be needed for years

Over 10 years or more, cash has often lost ground to rising prices. Short-term steadiness isn't the same as long-term safety.

2. Waiting for a good moment

Holding off for the "right time" to invest often means missing years of growth. Regular payments take the guesswork out.

3. Ignoring charges

1.5% a year against 0.2% sounds small, but over 18 years it can add up to thousands of pounds.

4. Selling after a fall

Selling during a crash turns a temporary drop into a real loss. If you think you might, cash may genuinely suit you better.

5. Never looking

Check once or twice a year. If an index fund is falling well behind the index it follows, or your charges have gone up, it may be worth moving.

So which one?

A stocks and shares Junior ISA may suit you if:

• You're comfortable with ups and downs along the way
• The money won't be needed for 10 years or more (remember it can stay invested beyond 18)
• Or it will be needed at 18, but that's still many years away
• You're paying in regularly and won't sell in a panic

A cash Junior ISA may suit you if:

• The money is needed for something specific at 18 and that's fewer than about five years away
• Any fall in value would really worry you
• It's one part of a wider plan

For many families with time on their side, history has favoured stocks and shares, not just to 18 but for years beyond as the ISA carries on into adulthood.

Try your own numbers

Our Junior ISA calculator lets you try:

• Different monthly amounts
• A one-off lump sum
• Different growth rates
• Keeping the money invested beyond 18

Next steps

1. Think about when the money might be needed: at 18, or later?
2. Be honest about how you'd feel if the value fell
3. Compare providers on charges and fund choice
4. Open the Junior ISA, without waiting for a perfect moment
5. Set up regular payments if you can
6. Involve your child, and explain that the ISA carries on after 18

Read our guide to Junior ISAs, or how to open one step by step.

Key points

• Over 10 years or more, stocks and shares have historically grown more than cash
• Starting early gives growth the most time
• 18 isn't a deadline: a Junior ISA becomes an adult ISA and can stay invested
• Charges matter, and low-cost index funds keep them down
• Cash makes most sense for money needed soon
• You can switch between cash and stocks and shares if things change

Related guides:

• What is a Junior ISA?
• Teaching kids about compound interest
• Junior ISA vs Junior SIPP
• Junior SIPP tax relief explained

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This article is for education only and isn't financial advice. The value of investments can go down as well as up, and past performance doesn't guarantee future returns.