How parents can help towards their child’s higher education costs
It’s back to school time, with the summer holidays drawing to a close. And as your children get older, thoughts inevitably turn to higher education, and the mounting cost of getting a degree.
Many parents understandably want to help their children with the costs of heading to university, but some of us leave it a little late. A study earlier this year from HSBC found a quarter of UK parents regret not saving early enough for their child’s education costs, with one in five saying they wished they had saved more.
So what steps can parents take to ensure they can offer some financial support towards their child’s education?
If you want to pack your little one off to college or university with a few extra pounds in their bank account, then a Junior ISA is an excellent place to start. They are tax-free savings accounts for the under-18s, which parents, grandparents and other family and friends can contribute to each year, up to an annual cap, which stands at £4,128 currently.
Depending on the type of ISA, this money will either be kept in cash or invested in the stock market. With the latter, while there is the potential for greater returns there is also the risk that you end up with less than you paid in.
It’s important to note that with a Junior ISA, the money is locked away until the child reaches the age of 18. What’s more, the money belongs to your child – it is in their name, and they can do what they like with it.
As with adult ISAs, you can switch providers each year in order to try to secure a better return on the money you have saved or invested.
Junior ISAs were launched to replace Child Trust Funds (CTFs), which were introduced by the Labour government and included cash from the government to get you started. You can transfer money from a CTF to a Junior ISA, which is probably a good idea as the rates on CTFs are no longer very attractive.
Child savings accounts
While Junior ISAs are a great way to save, the introduction of the Personal Savings Allowance means that everyone (bar additional rate taxpayers) gets to enjoy £1,000 of interest from their savings without paying tax (£500 for higher rate taxpayers).
As a result, a child savings account is a useful alternative, particularly if you aren’t dead set on the money being locked up until they reach the age of 18.
Be sure to compare the rates available on both Junior ISAs and child savings accounts when determining where to save the money.
Friendly societies offer child bonds, where parents pay in a small amount of money each month, generally between £10 and £25.
That money is then invested, with the idea that by the time the child reaches 18 or 21 the investments will have earned enough ‘bonuses’ (based on the performance of both the investments and the friendly society itself) that they will get back more than you paid in.
One interesting thing to note with a child bond is that with each statement you’ll be told a guaranteed minimum cash sum which your child will receive at the end of the term – so long as you keep up your payments, the child will get back at least what you paid in.
NS&I has its own Children’s Bond which is slightly different; you pay in £25 or more every month and it delivers a fixed return after a five-year term, currently set at 2%. However, the NS&I Children’s Bond is being withdrawn as it launches a Junior ISA.
It sounds bizarre, but even if you give money away before you die, if you don’t live for seven years after making that gift then the money is still classed as yours when it comes to calculating the value of your estate, and so could be liable for inheritance tax.
However, everyone has a £3,000 annual gift allowance which you can make use of to help with your child or grandchild’s school costs. What’s more, if you don’t use that allowance in one tax year, it carries over to the next, allowing you to give away up to £6,000 in a single year without the taxman interfering.
While it’s rare that children will pay tax on savings and investments as there’s only a liability if they earn above their personal allowance (£11,500), the rules are stricter on interest earned on money from a parent.
Maike Currie, investment director for personal investing at Fidelity International, said: “If your child earns more than £100 in interest in any tax year from money you have given them, then you will personally be liable for tax on the interest earned if it’s above your personal allowance threshold.”
What about private school fees?
For some parents, the additional costs of education are incurred long before their child heads off to university. According to figures from the Independent School Council earlier this year, average private school fees now cost parents more than £14,000 a year.
There are a host of strategies parents can adopt to try to tackle these costs, from making the most of their ISA income to opting for a flexible mortgage.