School Fees Planning – Where do you start?

Whilst we continue to navigate the world of lockdown and look forward to the gradual easing of restrictions, for many of us, this provides an opportunity to focus on our plans for the future. For parents, this may well include how you fund your children’s private education.

The percentage of children that are educated privately in the UK is around 6.5% according to the Independent Schools Council. As a whole, the UK independent sector educates around 625,000 children in around 2,600 schools.

Giving children a private education is the dream of many parents and grandparents. It could be a way to boost your child or children’s career and income opportunities, which is why many parents consider a private education a valuable investment.

When choosing a UK private school for your child, you will need to take into account fees. The cost of education may initially appear high but when you take into account the quality of teaching, small classes, high level of care and supervision, good accommodation and food in the case of boarding schools, often excellent academic and sports facilities and numerous extracurricular activities, it can represent a very cost-effective package.

How much do school fees cost?

Fees vary widely from school to school. The 2019 Independent Schools Council (ISC) Annual Census revealed that the average fees per term for pupils at ISC-member senior boarding schools was £11,304, with day fees at £6,634. ISC-member prep boarding school fees are a little less, at an average of £8,406 per term for boarders and £5,226 per term for day pupils.

It is understood the average annual cost of day and boarding school fees have risen by 49% in the last decade while continuing to rise at levels above inflation. The total average cost of an independent education in a day school over 14 years is calculated to be £158,256, based on the census information.

Funding for school fees

One in three private pupils receives fee assistance, for example through scholarships, bursaries or charitable trusts. Some schools also offer the option of paying a lump sum upfront, to receive a discount on future years’ fees.

For those without the necessary funds, you will need to take into account when you are likely to start paying fees, your current and future number of children, the estimated level of fees and increases, as well as your income, assets and any possible inheritance.

Tax planning and making investments go hand in hand when considering how to save for school fees. 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.

When investing, in the first instance you may well need to consider whether investment risk is necessary and whether you are comfortable with it. Sometimes a cash-based savings arrangement can work quite well but in the current environment, a reasonable interest rate is hard to find.

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, fixed income and commercial property. Spreading the money across these different investment assets is the best way to reduce volatility without limiting the potential for a reasonable return.

In a less certain environment, you may wish to consider holding at least three years of school fees in easily accessible cash, with the balance of the cash invested.

Use of tax wrappers

Utilising any available tax wrappers can be part of school fees planning if they are not earmarked for something else. For example, you can invest as much as £20,000 a year in a stocks and shares ISA – so £40,000 for a couple. This can provide a very effective tax-free wrapper for a portfolio designated to meet school fees.

The use of an accumulation and maintenance trust and any available capital gains tax allowance for both parents and children are also two key planning points to consider.

Mortgages

It is also possible to consider offset mortgages and re-mortgaging to raise the funds for private education. After all, most people do not have hundreds of thousands of pounds saved up to cover the cost of private school fees. With the rise in house values over the years this can often be a useful option, especially with current low mortgage rates.

The problem is you have to pay back the sum released, plus the added interest, meaning this will generally cost much more over the long-term. Having said this, with the possibility of a better salary in the future, this might be something to contemplate.

Grandparents

Often, there is a discussion with grandparents where they wish to help fund school fees, due to the benefits of inheritance tax (IHT) savings.

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.

Alternatively, a lump sum is free from IHT if the person making the gift survives for seven years. If grandparents provide a lump sum then parents can decide how to invest it. Alternatively, there may be trust-based solutions that can provide reasonable, tax-efficient funding.

Protection

It is important to remember to 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 child’s future.