Milestones and money: teaching your teen about their Junior 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. 

I can’t believe my “baby” is about to turn 17 and the milestones are coming thick and fast. Her first driving lesson and theory test are booked. She’s waiting on her mock A level results, and she’s even lined up a few university visits (gulp!). Time isn’t just flying by; it’s travelling at the speed of light. 

In just over a year, she’ll reach another milestone… her 18th Birthday. Not only will she be able to vote, drink alcohol, get married without consent and be eligible for jury service, but she’ll also take control of her Junior ISA as it turns into a regular Stocks and Shares ISA.  

By rights, there’s nothing we can do if she wants to blow all the money we’ve been squirreling away and investing for her over the years. But what I’d really like is for her to keep building on it, so she can do something meaningful with it later down the line.   

If you’re a parent, grandparent, godparent, or even an aunt or uncle who knows a child who’ll be taking control of their own Junior ISA in the coming years… here are the lessons I’ll be sharing with my own daughter in the hope it’ll encourage her to make better financial decisions in the future. 

1. What investing is and how it’s different to saving

As Julie Andrews famously sang in The Sound of Music, “Let’s start at the very beginning - a very good place to start.” So, the first thing I want you to understand is the difference between saving and investing.  

Saving in a regular savings account is safe, but the returns are usually quite low, and they may not even keep up with inflation. This means that over time, your money won’t grow much. Imagine putting £100 in a piggy bank – it will still be there in five years, but it won't have grown at all. In fact, because of inflation, it might even be worth a bit less as you won’t be able to buy in five years what you can today. 

On the other hand, investing gives your money the potential to grow, although there are risks involved as the value of investments can go up or down. But historically, investing has outperformed regular savings accounts in the long run. That’s why investing is considered more of a long-term strategy. Think of it this way. Plants don’t bloom overnight - they need time, water, and sunshine before you see the flowers. The same is true of your investments. We wanted to give your savings the best chance to grow, which is why we invested your money in a Junior ISA. 

• Investing versus saving: the basics

2. Understand the benefits of a Stocks and Shares ISA 

Now that we’ve tackled the difference between saving and investing, it’s time to look at the type of account your money is in. It sits in something called a Stocks and Shares ISA which is a type of account where your money is invested in the stock market. Instead of earning interest, like you would in a savings account, your money can grow by investing in things like companies (you’ll hear these referred to as stocks or shares), bonds and other assets. 

And while tax hasn’t been something you’ve had to deal with in your life so far, it’s about to play a major role. The type of tax that most people can relate with is income tax - something you’ll become all too familiar with once you start working full-time.

But with an ISA you don’t pay any tax - whether its income or capital gains - on the profit your investments make. Plus, each year you can save up to £20,000 to enjoy this tax perk (don’t let that big number put you off, as small contributions add up too). 

3. The importance of investing earlier rather than later… and staying invested  

I get it - it’s exciting to have a pot of money at your disposal. But if you spend it on all the things that you could save and budget for, it will soon disappear. If you use your Stocks and Shares ISA wisely though, it could help you achieve your longer-term financial goals, quicker. 

You’ve already got a nice pot of money at an early age. The sooner you start building on this and stay invested, the better, because the more time it has to potentially grow. Even if you only put in small amounts at first, those contributions will add up over time.  

• Learn about the benefits of starting early  

4. The power of small amounts - little and often can go a long way 

It’s hard to visualise the kind of difference we could be talking about, so let’s put it into practice.

Let’s say your Stocks and Shares ISA is worth £10,000 right now. You decide to take out £1,000 to help fund your interrailing trip around Europe, leaving you with £9,000.

When you get back, you decide to save £100 each month into your Stocks and Shares ISA for the next ten years. The total amount you’ll have paid in will be £21,000.

If it grew at a medium rate of 5% it could be worth £27,937. If it grew at a high rate of 8%, it could be worth a whopping £34,652. Of course, it could fall in value too that’s the risk of investing (source: Fidelity’s ISA calculator).

• Do your own maths with our easy-to-use ISA calculator

How does this work exactly? Well, if you don’t touch any gains you make and reinvest any dividends, these returns (or profits) will get added to the amount you originally invested.

For simplicity’s sake, let’s imagine you have £100, and it earns 10% interest each year. Here's how it could grow.

So, after three years, your £100 has grown to £133.10 as you're earning interest on both your original £100 and the interest that’s been added in previous years. It's like a snowball rolling down a hill, getting bigger and bigger over time.

• Learn more about investing regularly
• Learn more about the power of small amounts

5. Don’t put all your eggs in one basket: why it’s good to hold a mix of investments

And finally, let’s talk about choosing your investments - as you’re in the driving seat now! 

When it comes to investing, it’s best not to put all your money into one thing. It’s better to hold a mix of different investments like shares (stocks), bonds and other assets as they can behave differently during the same economic conditions.

It’s also important to remember that investing comes with risk. Some investments can be more unpredictable - like shares, which can go up or down quickly. They’re higher risk, but with that risk comes potentially higher returns. But other investments, like bonds that are at the lower end of the risk spectrum, tend to be more stable but come with lower potential rewards. 

So, by having a mix, you’re balancing out the risk: if one investment goes down, another might go up or stay steady - giving you a better chance of a smoother ride over time, no matter what’s happening in the world. 

• Understand how to manage risk
• Help with choosing investments

What to expect if your child has a Junior ISA with us

We’ll write to you a few months before your child turns 18 so that you have time to get ready for the day when it ‘matures’ into a regular ISA. To make sure it changes hands securely and safely, you’ll need to supply additional documentation - all the details will be in the letter. We’ll also write to your child once they turn 18. 

In the meantime, you might want to make use of any of this year’s unused Junior ISA allowance (which is currently £9,000). It’s also worth telling anyone who’s been making regular payments into your child’s account that we’ll cancel their direct debits as once it becomes a regular ISA, only the account holder can pay into it. 

• Open a Junior ISA 
• Read: How maxing out a Junior ISA can turn into a £243,561 nest egg 
• Read: Can I transfer my ISAs to my grandchildren to encourage them to save?