Junior ISAs have become an increasingly popular way for parents to build a tax-efficient nest egg for their child’s future, but could individual savings accounts also help to support the financial literacy of kids?
According to a recent report that was created using Office for National Statistics data, one-third of 25 to 34-year-olds in Great Britain are living with ‘negative wealth.’ In Wales, this figure rises to 47% of the age group.
The think tank that compiled the report, No Money, More Problems, stipulates that negative wealth refers to scenarios where debts outweigh assets for individuals and is linked to lower wages and worse health later in life. Worryingly, average net debts in the United Kingdom rose 25% in real-terms from £5,008 in 2010 to £8,313 by 2022, underlining the necessity of financial readiness for young people to avoid the pitfalls of modern finance.
Although the rising cost of living is a major challenge for many young people in the UK today, improving the financial education of young people can provide significant support in helping to avoid the dangers of negative wealth. For parents concerned about their children gaining the financial literacy they need for later life, a Junior ISA may serve as a key opportunity to provide hands-on saving or investment advice while providing their loved ones with a nest egg to manage as they reach adulthood.
JISAs Lead Early Life Wealth Building
Because of their tax-efficient wrapper, a Junior ISA, or JISA for short, is one of the most effective ways for parents to save or invest for their children. They can be opened at any stage of your child’s life, from the moment they’re born until they turn 18, and any profits made can be withdrawn with no capital gains tax (CGT) or income tax obligations.
Junior ISAs come in two forms: a savings-focused Cash JISA and an investment-themed Stocks and Shares JISA, allowing parents to make contributions in a way that supports their risk appetite. All JISA contributions are subject to a £9,000 annual allowance, meaning that you can’t contribute more than this limit across all the Junior ISAs opened in your child’s name.
With around 1.37 million active Junior ISA accounts subscribed to in the 2023/24 tax year, it’s clear that many parents are already using the strategy to build savings or investments for their children. According to MoneyWeek data, holding Junior ISAs can also be extremely lucrative for youngsters, with a reported 2,000 accounts accumulating more than £100,000 in value. However, it’s the prospect of teaching children valuable lessons in wealth management that could carry an equally strong impact during such formative years.
A Tool for Financial Literacy?
It’s important to note that any money contributed to a Junior ISA can’t be withdrawn until the account holder reaches 18 years of age. Although this can be a little restrictive for parents who may be uncertain about their future financial comfort levels, it means that their child’s JISA has the potential to double-up as a valuable learning tool.
Legally, a child can take over the management of their Junior ISA when they turn 16, allowing them to manage their account, add funds, and receive updates on its progress before they turn 18 and are allowed to withdraw. This means that if they take on part-time work, they can budget their earnings responsibly to add to their savings or investments.
However, parents can take a more hands-on role in JISA contributions from an earlier age, potentially consulting with their child on how and where to invest their pocket money, and regularly checking in on how quickly their contributions are progressing.
Particularly for Stocks and Shares JISAs, youngsters can gain a glimpse at stock market investing, where they can physically see how their funds are growing as part of different investment strategies. As your child grows up, they can be gently introduced to concepts like diversification and compounded interest in a more engaging way.
Family-Guided Education
Another great advantage of Junior ISAs is that anyone can be invited to make contributions if the provider allows this, meaning that grandparents can subscribe money for special occasions like birthdays. This opens the door to the prospect of family members supporting the child’s financial education by asking whether they would like the money to be saved or invested and how.
It also means that family friends can introduce the account holder to the concept of earning money to be invested in return for odd jobs like raking leaves or cleaning cars. These wider initiatives can all contribute to preparing your child for later life and the concept of saving or investing earnings to help build those all-important rainy day funds for when they’re needed most.
Reaping the Benefits of JISAs
Because of their tax-free status, Junior ISAs have fast become one of the UK’s favourite ways to put money aside for their children’s future. Already, thousands of account holders have accumulated a significant amount of wealth to support their first steps into adulthood.
But equally as valuable, more children than ever are gaining invaluable exposure to concepts surrounding saving and investing from a young age. This makes JISAs a multifaceted tool for wealth creation and management in equal measure, providing your loved ones with the core skills they need to successfully navigate life as an adult.
