Using the JISA to teach children about money

Smart money habits: using the JISA

The Junior ISA – a tax-free saving and investing account for children– is a smart way to build a nest egg for your little ones, given the looming mountain of costs that young adults face. And yet, some parents may worry about how the funds will be used once they become accessible. 

Not only does stockbroker data soothe concerns, but profligacy can also be avoided by using the JISA as an opportunity to teach your kids valuable money habits and the basics of investing as a superb mechanism for building long-term wealth. 

An ever-growing mountain of expenses

With £1 billion paid into Junior ISAs in 20/21,¹ Brits are seeking to help their kids and grandkids amid an increasingly difficult financial landscape that awaits them later on. In particular, the biggest challenges are funding further education and buying their first home.

Upon graduation, the average student has debts of more than £45,000.² And when it comes to buying their first home, someone on an average income would need to spend 8.3 times their annual earnings to buy an averagely priced home. It leaves many stuck in the rental market, where rents have been hiked by 10%³ on average over the past year alone.

As a result, parents, grandparents, uncles and aunts are turning to Junior ISAs as a way of easing the pain down the line. This opens up their financial gifts to the wealth-building potential of stock markets, all the while avoiding the taxman’s glare. What’s more, the long runway of growth means there’s plenty of time to ride out stock market volatility and generate attractive long-term returns.

Harnessing the power of the JISA

Introduced in November 2011 as a replacement for the Child Trust Fund, Junior ISAs work much the same as adult ISAs. All you need do is open one at your stockbroker, contribute some money, and start investing in products such as Alliance Trust. As it’s a tax wrapper, any growth of contributions (capital gains) or income generated won’t be liable for a single penny of tax.

What’s more, the annual allowance is separate from a parent’s ISA, allowing for contributions of up to £9,000 per JISA each tax year. Although, it’s worth noting that, while investments in the ISA itself are free from taxes, if an individual contributes more than £3,000 in a single tax year, they still may be personally liable for inheritance tax (IHT) if they die within seven years.

Legally, while the parents will be the ones setting up the JISA and managing its investments, contributions are locked away in the child’s name. At age 16, they’re allowed to start managing investments on their own, and at 18, the JISA will transform into a regular ISA for them to use as they see fit. However, it is these final freedoms that can make parents a little nervous: will it be used responsibly?

Trip to Magaluf, anyone?

Reluctance over using JISAs, arises from the fact that there is nothing stopping a young adult getting their hands on it, as it converts to an adult ISA on the day of their 18th birthday. Imaginations run wild, as parents foresee small fortunes being squandered. Yet the figures do not support this assumption. According to Hargreaves Lansdown, 93%⁴ of its young investors with newly minted ISAs still have them one year on from maturing.

Nonetheless, there are some actions parents can take, if they’re keen on teaching their kids some smart money habits.

Here's four top tips to prepare young adults for a windfall:

1) Let them know about their nest egg early on

Talking to children about their looming lump sum, and how it’s growing and maturing over time, will build a sense of responsibility and ownership. Once it’s time to receive the money at 18, they are much more likely to have made plans about how best to use it for their futures.

2) Teach them in lockstep with other aspects of money management

Parents usually start children off on their financial journeys with small amounts of pocket money, increasing their financial responsibilities over time. In lockstep, the JISA offers an opportunity to gradually introduce kids to concepts of investing, for example markets, assets, risk and reward, and diversification. This will be extremely valuable, not only for managing their adult ISA, but for other aspects of their long-term finances, such as pensions.

3) Warn them about the dangers of social media messaging

As teenagers become introduced to social media, it’s worth warning them about the dangers of financial influencers, who may be promoting unrealistic and promissory messages on the returns of certain financial instruments. This is not necessarily to put them off using popular assets such cryptoassets or individual shares, as this may be counterproductive, but rather to outline the risks involved and ways of managing them.

4) Use stock market cycles to teach them about investing emotions

History tells us that stock markets cycle through peaks and troughs, which has the potential to generate anxiety and poor decision-making. Parents can use tougher times to discuss that investments will inevitably fall in value from time to time, that a recovery is more than likely, and that a long-term time horizon is essential if they are to ride out stock market volatility and build wealth.

Investing in your JISA

Some parents are perhaps overly risk-averse when it comes to investing for their children, with figures from Hargreaves Lansdown showing that 57% of their JISA investors put contributions into cash.5 This exposes savings to the ravages of inflation. Given that a long runway of up to 18 years offers plenty of time to ride out stock market volatility and tap into its inflation-busting potential, investing in shares is likely to be the more attractive option.

In addition, funds and investment trusts can be used to diversify the risks associated with investing in individual company shares, with data from stockbroker AJ Bell showing collectives to be the preferred option when JISA contributions are invested in the stock markets.⁶

Alliance Trust is a popular investment trust among private investors and seeks to balance stock market risks by using nine different stock picking teams to invest in a wide portfolio of shares from markets across the world, aiming to provide both long-term capital growth and a source of steadily rising income.

Marcus de Silva is a Freelance Investment Writer

1. Hargreaves Lansdown, as at 16 March 2023

2. Hargreaves Lansdown, as at 28 March 2023

3.Hargreaves Lansdown, as at 28 March 2023

4. Hargreaves Lansdown, as at 28 March 2023

5. Hargreaves Lansdown, as at 16 March 2023

6. AJ Bell, as at 8 March 2023

This information is for informational purposes only and should not be considered investment advice. Past performance is not a reliable indicator of future returns. The views expressed are the opinion of the Manager and are not intended as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell any securities. The views expressed were current as at September 2023 and are subject to change. Past performance is not indicative of future results. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. You should not assume that any investment is or will be profitable. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

TWIM is the authorised Alternative Investment Fund Manager of Alliance Trust PLC. TWIM is authorised and regulated by the Financial Conduct Authority. Alliance Trust PLC is listed on the London Stock Exchange and is registered in Scotland No SC1731. Registered office: River Court, 5 West Victoria Dock Road, Dundee DD1 3JT. Alliance Trust PLC is not authorised and regulated by the Financial Conduct Authority and gives no financial or investment advice.