Many students have received their A-level results recently and firmed up plans for further education or vocational roles. It can be a stressful time, and anxiety over paying for the next steps can be a significant part.
University, it is often said, represents the best years of your life, but they can also be expensive, and costs are often underestimated. Tuition fees and living costs can add up – to an average of £57,000 over three years it’s been estimated. Effective budgeting, student loans and part-time work can help students make ends meet, but long-term saving and investing in advance can help provide a valuable leg up or even allow your offspring to graduate debt free.
With respect to younger children, while many parents would like their children to be privately educated, even with the help of grandparents this can be too expensive. Fees vary widely from school to school, but the 2022 Independent Schools Council (ISC) Annual Census revealed the typical fee level is £5,218 per term for day schools, or £15,655 per annum, a rise of 3.1% in 2021. Only 7% of school children in the UK are privately educated, and although very much desired it may not be affordable.
How can you plan for school and university fees?
Your children's education is a valuable investment and early planning can make a big difference in covering the somewhat daunting sums of money involved. When weighing things up you will need to consider when you are likely to start paying fees, your current and future number of children, the estimated level of fees and increases, the potential use of student loans, as well as your income, assets and any possible inheritance.
You also need to consider your general attitude to investment risk, your current tax status and how this might change. You’ll also need to think about whether your preference is to invest a lump sum, a monthly amount or a combination of the two to meet the amounts required.
Should you save or invest?
History suggests that owning assets, notably equities (in other words investing in the stock market), is a good way to grow wealth over the long-term, outpacing interest rates on secure investments such as cash. However, investing may not be appropriate or, in some cases, necessary.
Sometimes a cash-based savings arrangement can work quite well, but in the current environment, a reasonable interest rate is hard to find. Investing money means taking risks, which won’t generally be suitable for short periods of under five years. To achieve a greater return than cash, all or some of the capital is exposed to potential losses. One route is to keep five years of education fees in easily accessible cash, with the balance invested.
To maximise returns and minimise risk, you would ideally need to hold a well-diversified portfolio across the major investment types; UK and international equities, bonds and alternative areas such as commercial property or infrastructure. Spreading the money across these different investment assets is the best way to reduce volatility without limiting the potential for a reasonable return. Investing regularly, through the bad times as well as the good, can also help even out the market's ups and downs.
Make use of tax-efficient products
Tax planning is also instrumental when considering how to save for school and university fees. Utilising any available tax wrappers can be part of school fee planning if they are not earmarked for something else. For example, you can invest up to £20,000 a year in an ISA (or Individual Savings Account), so £40,000 for a couple. Cash ISAs can be used as a tax-free savings account, or you can choose a Stocks & Shares ISA to invest in the stock market and other assets.
Junior ISAs could be a particularly good option to save towards university costs as they allow parents, as well as other family and friends, to build up tax-efficient savings and investments for a child. Up to £9,000 a year can be put aside. The tax benefits are the same as an adult ISA – no capital gains tax, and no further tax to pay on income. Withdrawals are possible from the age of 18 when it automatically converts to an adult ISA, meaning the pot can be useful to help with the costs of education from this point.
Find out more about Junior ISAs.
How can grandparents help?
Often, there is a discussion with grandparents where they wish to help fund school fees, due to the benefits of inheritance tax (IHT) savings.
Gifts of up to £3,000 fall outside the IHT net. Also, IHT is not incurred by those who contribute a regular amount from their income, assuming the money donated does not affect the lifestyle of the donor and thus force them to use savings. If grandparents use their accumulated wealth to provide a regular income, then they can gift from this free of any IHT issue, though this should be documented properly. Alternatively, a lump sum is free from IHT if the person making the gift survives for seven years, plus there are some trust arrangements that can be made if circumstances are more complex and the amounts involved are significant.
Protect as well as invest
Remember to consider and review life, critical illness and income protection insurance. Should you unexpectedly die or be unable to work through illness or injury, the financial planning for your children and their education could be jeopardised. Having in place the appropriate level of cover can offer reassurance and peace of mind for the future if anything were to happen.
It is important to plan ahead and take appropriate tax and financial planning advice to ensure you consider the various options to help secure your and your children’s long-term financial well-being.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
How can you save towards children’s school fees or university?
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