School fees: How to save for your children’s education
Private education is more expensive than ever with even the most affluent worrying about soaring fees.
According to a report out last week, school fees have risen 24% in the last five years and more than a third of wealthy parents have considered taking their kids out of fee-paying education as a result.
A separate study released last month suggested parents will have to shell out more than £200,000 – or £500,000 for boarding – if they want to send their children to private school until the age of 18.
Fees are not the only consideration. None of this cheery news includes the additional costs of uniforms, books and those expensive school trips that seem to go with the territory.
But if you have your heart set on sending your offspring to a private school, careful financial planning means it doesn’t have to be a pipe dream.
Don’t overpay your taxes
The first thing parents and grandparents should do is make sure their financial affairs are in order.
Scott Gallacher, a chartered financial planner at Leicester-based IFA firm, Rowley Turton, says he has seen a number of new clients recently who were inadvertently paying too much tax.
One common error, he says, is company owners paying themselves a salary rather than a dividend and incurring unnecessary National Insurance costs.
“We were able to identify a £7,000 a year saving for one of our small business clients,” Gallacher says.
Another typical oversight is partners not equalising their income.
“If you are a higher rate tax payer and your partner is a basic rate tax payer you can equalise your income by transferring assets from one to another. We saved one client £4,000 in one year by doing this.”
Other mistakes Gallacher has encountered include: company owners paying life assurance or pension contributions themselves rather than via their company; improper inheritance tax planning meaning the family’s wealth passes to the Chancellor rather than future generations; investors being too cautious or relying on cash deposits meaning that inflation erodes the real value of their wealth; and clients not properly insuring themselves against death or serious illness.
It is never too early to start saving for your offspring’s education. Jaskarn Pawar, a chartered financial planner at Investor Profile in Northampton, says it is not a simple matter of working out how much you will need to save today to be able to afford fees in the future, it is also about scenario planning.
“What if one partner is not working or earning less in x number of years? If your child is 5 and you are considering private education to 18 then 13 years is a long time and anything can happen,” he says.
Open an ISA
Making use of your tax-free ISA allowance to save for your children’s education is a must.
In the current tax year, which runs from 6 April 2013 to 5 April 2014, you can put up to £11,520 in your ISA. (For the 2014-15 tax year, the ISA limit will increase to £11,880).
You can put all of your contribution into a stocks and shares ISA. Or you can put up to £5,760 in a cash ISA (£5,940 for 2014-15) and the rest into a stocks and shares ISA.
If you start saving early enough, it may be a good idea to take on more risk by investing in the stock market rather than letting your money languish in cash. The longer the time horizon, the more risk savers are generally able to take.
Fidelity calculates that if a saver had invested £1,000 into the FTSE All Share index over the last 10 years (from 27 Feb 2004 to 31 Jan 2014), they would now be left with £2,201.41. If, however, they had invested £1,000 into the average UK savings account over the same period, they would be left with £1,106.71. That is a difference of £1,094.70.
Set up a trust
Trusts are legal arrangements where money or assets are held by a person (known as the trustee) for the benefit of another (the beneficiary). Commonly, money (or assets) can be passed as a gift into the trust and held or invested until such time as the trustees distribute money or assets to the beneficiaries.
Trusts can allow you (or someone you nominate) to retain control over when and how money is distributed.
Danny Cox, head of financial planning at Hargreaves Lansdown, says trusts are useful for saving for children because they allow you to pass on money before children are old enough to be given the money directly.
Trusts are also useful for inheritance tax (IHT) planning in that currently gifts to trust may reduce the value of your estate and so reduce the amount of IHT owed upon death.
Bare trusts are the simplest type of trust. The child is the beneficiary and there are normally two adults acting as trustees. The child becomes automatically entitled to the investments at 18. However, as a trustee, you can distribute money earlier if you need to, for example to meet school fees.
The account is opened in the name of the trustee and designated for the benefit of the child. This means HMRC considers the account to be belonging to the child and simply administered by the trustee.
In the majority of cases any tax liabilities fall on the child but in practice there is usually none to pay.
Gallacher suggests asking grandparents to pay the fees for you, especially if they have an inheritance tax issue and sufficient spare income, as the schools fees would be exempt from inheritance tax under the ‘normal expenditure out of regular income’ exemption.
Grandparents could also consider making a gift into a trust to pay the school fees as this could give an inheritance tax saving as the gift would be exempt from inheritance tax after seven years.
Apply for a bursary
Independent Schools Council schools have a bursary provision, providing more than £620m in fee assistance annually.
A total of 166,643 pupils received help with their fees this year, which is about a third of ISC pupils.
Means-tested bursaries were worth an average of £7,619 per pupil per year and were held by approximately 7.8% of all pupils at ISC schools. There are 4,954 pupils at ISC schools who paid no fees at all.
ISC says there has been a shift away from scholarships to bursaries in recent years, with schools choosing to put more money into bursaries to widen access opportunities. The days of the 50% scholarship are now rare, although scholarships are still awarded for outstanding academic, music or sporting achievement at many schools. Some schools, such as Christ’s Hospital or Manchester Grammar School are able to offer very generous bursary provision to a large number of pupils. Increasingly more schools are diverting their fund raising to this purpose.
To apply for a bursary, contact the school’s Admissions Team directly.