Financial wellbeing is a huge issue for employers in today’s world, but parents need to start educating children about their finances at an early age, says James North from Vanguard Europe.
We all want the best for our children. For many parents, that involves setting aside money to help them learn to drive, pay for university or buy a house.
Junior ISAs – or JISAs – can be ideal in this respect. Parents or parental guardians can easily set one up, but anyone can contribute, up to a maximum of £9,000 for the current tax year and 2023/24 tax year. Proceeds then grow free of tax on capital gains and dividends or interest, with any withdrawals tax-free too.
JISAs come with more than just tax advantages though – they can also be used to teach children about the benefits of long-term savings and investments.
While investing is more common than ever before, younger generations suffer from a lack of confidence. A survey from the London Institute of Banking and Finance found that 81% of 15 to 18 year olds worry about money, with just 15% citing school as their main source of financial education.
Junior ISAs offer an opportunity for you to teach your children about investing. When you feel they’re old enough, talk them through the choices you’ve made in their ISA and why, together with what some of the terms mean.
You can help familiarise them with the concept of compound interest, where your investment builds up as you generate returns on your returns. Start early enough and they’ll have a multi-decade lesson on the power of compounding, one which they’ll thank you for later.
To help show this in action, imagine someone who opens a Junior ISA on their child’s ninth birthday, approximately 10 years before they go to university. They start by investing £2,500, continuing to invest £1,200 each year, which they also increase by 2% annually to take account of inflation. We’ve assumed that the assets grow by 5% a year on average, not including costs.
By the time they turn 14, the midway point, the Junior ISA has grown to around £10,000. Two years later, and they’re legally allowed to make their own investment decisions at 16, by which point they have just shy of £14,000. They may therefore decide to move into a lower risk portfolio if they want the money for university in the short term, or they may decide to increase risk and aim for higher returns if they expand their time horizon and want the funds for beyond university.
The common worry with JISAs is what happens when your child turns 18. Legally, Junior ISA assets belong to the child, and they can do what they like with the proceeds once they reach adulthood. Your JISA ambitions might therefore be spent on nights out rather than nights in revising.
But what happens if they don’t have experience of investing at 18? The rise of social media and financial influencers, or ‘finfluencers’, has helped many people make their first investments. Yet there has also been a rise in online investment scams and ‘get-rich-quick’ schemes, with UK investors losing £890m in the 2021/22 tax year, according to the City of London police.
Teenagers and young adults can also easily fall prey to investment fads, particularly as they are likely the main targets. By familiarising children with the nuts and bolts of investing, you can help protect them from fads or outright frauds.
A Junior ISA can help establish and strengthen the link between healthy investment behaviours – such as keeping an eye on costs and being disciplined – and long-term financial success. Once a year, for example, you can show them how much the account has grown by or fallen in value and discuss whether their Junior ISA is on track for what they
may want to achieve with it.
Money is much less tangible than it used to be. We prefer cards over cash, with financial services increasingly offered only online. Our children’s first experience of physical money may well come from playing in a classroom or even from the board game Monopoly, assuming they handle cash at all.
Given the increasingly ‘unreal’ feel of money, financial education is more important than ever before. Junior ISAs can be a valuable tool in your financial education armoury, helping to teach important habits like saving, encouraging ownership of finances and facilitating a real understanding of money which avoids scammers.
*James Norton is Head of financial planners, Vanguard, Europe.