Working out the best way to pay for a child to be educated privately can stretch most parents’ and grandparents’ skills with a slide rule to breaking point. Even for those with very high earnings, paying fees that can amount to tens of thousands of pounds per year out of regular income can be a strain, particularly if more than one child is in education.
Forward planning can, however, soften the blow and enable parents or grandparents to pay school fees without taking a major hit to their standard of living. As with so much in financial planning, the earlier you start saving the better.
Set your goals
Before you start saving or investing for your children’s or grandchildren’s education you need to establish a target sum that you are aiming for. Doing this will involve a number of variables.
First, how many children do you plan to put through school? This may seem obvious but it could be an easier question for parents to answer than for grandparents, who may find themselves with unexpected additions to the family who, fairness dictates, should be given the same start in life as their older siblings or cousins.
Second, you need to know for how long school fees will be paid. Will you just be paying for primary or secondary education, or will it be both?
Thirdly, it will be helpful to have an idea of which school(s) will be involved, as fees vary greatly between institutions. Armed with this, an idea of the timescale and how many children will be put through private/public school, and with fees adjusted for likely inflation over the period involved, it will be possible to work out the capital sum you need.
The need to factor in inflation, and also the fact that fees will be paid out over a period of years, makes this quite a complex calculation. A good financial planner ought to be able to do this for you.
Once you know how much capital you will need, and how long you have in which to accrue it, you can work out how much you will need regularly to put into your investment pot. This will also depend on the level of investment returns you expect to achieve (these cannot, of course, be guaranteed).
If you are going to need to start paying fees relatively soon – for example within five years – then low-risk investments, or cash deposits, will probably be most appropriate. If, however, you are looking at a longer timescale then the potential for higher – though more volatile – returns from a portfolio of shares could be more suitable.
Another question is whether you plan to have the whole sum available at the commencement of the child’s education, or whether payment will be phased over a number of years. If the latter then it may be appropriate to remain invested over the course of their education in order potentially to maximise returns.
In this case, though, “sequencing risk” needs to be considered. If you are making regular withdrawals from an investment there will almost definitely be times when this is done during a falling market, meaning that less remains in the pot to benefit from any future growth, potentially creating a shortfall.
A financial planner should be able to advise you on the wisest strategy to deal with this.
If you are not yet using up your full ISA allowance, which stands at £20,000 per person (or £40,000 per couple) per year in 2018/19 and 2019/20, then this would be the obvious starting point. ISAs can invest in cash, stocks and shares or even peer-to-peer loans, and any growth is free from capital gains and income tax.
For grandparents, meanwhile, Inheritance Tax (IHT) planning might be a priority. Gifts made from surplus income can immediately be exempt from IHT and gifts into trusts can become entirely free from IHT after seven years have elapsed (but be careful if you plan to do this regularly because the seven-year clock is reset every time you make a potentially IHT-exempt gift within seven years of the initial gift into trust – the so-called “14-year trap”).
Finally, before deciding to pay for a child’s education, make sure you can actually afford it. A lifelong cashflow forecast carried out by an experienced financial planner will help you decide whether this is a commitment you are really able to make.
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