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Back to school – one lesson they won’t teach in class

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

“I've been making a list of the things they don't teach you at school. They don't teach you how to love somebody. They don't teach you how to be famous. They don't teach you how to know what's going on in someone else's mind. They don't teach you what to say to someone who's dying. They don't teach you anything worth knowing.” So said Neil Gaiman in his novel The Sandman, Vol. 9: The Kindly Ones.

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Another he could have added to the list is that they don’t teach you how important it is to start saving as early as possible. That’s one lesson that tends to be learned with hindsight. So, as a new school year starts it’s a good time to teach your kids the very important lesson of how to become a better saver.

Whether you want them to have a pot of money for university, to put towards their first home or to help pay for their wedding, a Junior ISA (JISA) is an ideal way to start them on the path to being a smart saver. Designed for children, it’s a flexible and tax-efficient way to help them save with no income or capital gains tax payable on any returns.

Every eligible child has an annual JISA allowance. They can invest up to £4,368 in the current tax year. As their parent or guardian, you open the account for them, in their name. The money invested in it cannot be taken out until your child reaches the age of 18, at which point the money will become theirs.

The beauty of the JISA, aside from the tax-efficiency it offers, and the fact that the money is locked away out of temptation’s reach, is that anyone can contribute to your child’s JISA.

So, as well as you being able to save into the JISA for your child, friends and family can contribute too. So, Christmas and birthday money can all be added over the years, as long as the total amount saved in any year is within the current annual tax-free limit.

From childhood to adulthood

When your child reaches the age of 18, the JISA is automatically converted into a regular ISA, so your now fully-fledged adult son or daughter can continue saving tax-efficiently for whatever they may need – whether it’s a car, the deposit for their first home or the money for more day-to-day expenses, such as living costs at university.

Between the age of 16 and 18 your teenage child can also open a regular cash ISA and contribute to that, in addition to whatever has been added to their JISA over those two years. That gives them the unique ability to save an additional £20,000 in the 2019/20 tax year; giving them a bigger tax-free savings allowance than any other group.

Make sure youth isn’t wasted on the young

They don’t have to invest large sums to get started. A regular savings plan makes getting them into the savings habit more easily achievable, as they can start from £50 and has the added benefits of pound/cost averaging, where their investment buys more shares or units when markets are down.

Thanks to the power of compounding, the younger you can get your child into the saving and investment habit, the better. Given time, that £50 a month or more will have time to grow nicely. And, of course, the sooner they start investing, the more their investments will grow.

Keep some control of the reins

Of course, you might not want every penny that you’ve diligently saved to go straight into your child’s hands when they turn 18. If you want to retain some control over what the money is spent on, then saving into your own ISA is a good way to do that.

With a £20,000 annual allowance in the current tax year, that’s a tidy sum you can accrue and have at your disposal when it comes to helping with university costs, as a step-up onto the property ladder, or just being able to step in when they come tapping (as they invariably will) at the doors of the Bank of Mum & Dad.

Retaining some flexibility by also investing in your ISA means you can save tax-efficiently for other pre-18 child costs too that might come up, such as school fees, driving lessons and so on. Each eligible adult can save up to £20,000, so two parents can save efficiently and build up a substantial sum to cover costs that may come along. And if there’s any money left over, you might even be able to treat yourselves. Win win!

Start your child’s Junior ISA today

Start your own ISA

Important information The value of investments and the income from them can go down as well as up so you may get back less than you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a Junior ISA will not be possible until the child reaches age 18. Junior ISAs are long term tax-efficient savings accounts for children. A Junior ISA is only available to children under the age of 18 who are resident in the UK. It is not possible to hold both a Junior ISA and a Child Trust Fund (CTF). If your child was born between 1 September 2002 and 2 January 2011 the Government would have automatically opened a CTF on your child’s behalf. If your child holds a CTF they can transfer the investment into a Junior ISA. Please note that Fidelity does not allow for CTF transfers into a Junior ISA. Parents or guardians can open the Junior ISA and manage the account but the money belongs to the child and the investment is locked away until the child reaches 18 years old. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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