We all want the best start in life for our children and for many of our clients, this means paying for a private school education. Paying for school fees can be expensive though and joint incomes can sometimes be reduced after having children, as one parent reduces hours or stops working. This shouldn’t stop you from privately educating your children though, providing you have taken the necessary steps to plan ahead.
Stuart Johnstone, an Independent Financial Adviser at Wren Sterling looks at common problems in planning and some tips for getting it right.
Money Matters: What’s the single biggest consideration for parents looking at paying for their children’s education?
Stuart Johnstone: For several reasons, getting the right protection in place – whether that is life cover, critical illness cover or protecting one’s income.
When looking at private education, parents should be prepared to commit for the duration, not just for the benefits of a private education, but also to ensure continuity. This applies regardless of whether they plan to pay through income or a dedicated savings or investment plan.
On death, no parent would wish a child to be forced to leave a school and cope with the loss of a parent at the same time. It’s often considered an afterthought, but disrupting the education of a loved one at a critical time is something we would all choose to avoid. The same could be said towards a parent being diagnosed with a critical Illness. The impact this may have on education planning can be sizeable.
MM: When do people typically start planning to pay for their children’s education and when should they start?
SJ: As early as possible, particularly if you’re planning to save for it because you benefit from compounded interest over the years. If you’re planning to use an investment, a long term timeframe gives you the best opportunity to smooth out any ups and downs of investment returns. However, I see a lot of clients that come to me when their child is about to start primary school and wish to begin a conversation – that doesn’t leave a lot of time and can impact on other previously made plans.
More recently, there has been a big rise in those that wish to discuss secondary school funding which has been forced on them through lack of spaces or geographical changes in state school catchment areas.
In some instances it can make financial sense to move home to be nearer a more desirable school, similarly, with the associated costs of moving home, paying for a private education can make more sense. But this is strictly down to individual circumstances.
MM: What are common ways to pay for school fees?
SJ: Lots of clients choose to pay for this through income – but they need to be mindful of my first point about protection if they go down this route. Death in service cover for example may not be enough to pay for the remaining years in education.
Clients that don’t want to pay through income look at savings and investments – such as investment bonds and ISAs where they can drawdown amounts as and when, and loans – such as an offset mortgage.
MM: So how much does it cost?
SJ: It’s fair to say this varies a lot. The overall average termly fees is £5,562, so over a 14 year schooling period, that’s over £233,000, but this varies a lot depending on the school and area of the UK, with the north generally cheaper than the south. State school education is calculated at around £22,000. This is when costs like uniforms, out of hours care and transport are factored in.
So when looking to do a fair comparison, parents shouldn’t assume that state school education is free and when you look closer, there are some savings to be made as a result of choosing independent education.
There are hidden extras for parents of sporty or musical children in state schools. Where a private school will typically provide these types of clubs and specialist coaching, state schools may not, so the costs of joining affiliated clubs outside of school needs to be considered.
Additionally, the main carer may be able to undertake more working hours as a result of extended school hours and benefit from reduced family meal costs as a result of the child having their main hot meal at lunch time. This can all add up to a significant contribution towards the cost of independent education.
MM: How has pensions freedom changed things?
SJ: Some grandparents may now find themselves in a position where they will consider releasing cash or additional income to help pay towards their grandchild’s education that way. I would stress however, that this is the exception and not the rule.
Pensions should still be used to help fund retirement and provide an income.
MM: What else should parents consider?
SJ: There are hidden costs with private school education. For example, annual fees can sometimes increase as a child gets older and sits GCSEs or A Levels. This might be obvious, but in an environment where there are other privileged children, keeping up with the Joneses can get expensive, so parents should give this thought when planning ahead.
3 methods of saving for school fees
1) Using ISAs
The tax free advantages of an Individual Savings Account (ISA) mean that they can be a very effective means of saving and funding Private Education. Furthermore, one benefit of ISAs is that you can save on a monthly basis if you are not in a position to subscribe the full amount (£15,240 in 2015/16 tax year) as a lump sum.
2) Offshore Bond
Making a lump sum investment into an offshore bond could also be a tax efficient solution which utilises the tax allowances of your child or children, thereby keeping your ISA savings for other financial objectives or goals you may have.
3) Bare Trust
Equally, establishing a Bare Trust and investing a lump sum through this can also be tax efficient particularly if the Trust is set up by Grandparents as the income generated within the Trust is treated as the child’s own for tax purposes.
To plan ahead for private education, please contact your Wren Sterling adviser.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
The value of your investment can go down as well as up and is not guaranteed and you may not get back the full amount of your investment.
This information is based on our understanding of current taxation, legislation and HM Revenue & Customs practice, all of which may change without notice. The impact of taxation (and any tax relief) depends on individual circumstances.
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