There are a number of excellent investment routes open to parents wishing to educate their child at an independent school. Popular options include Personal equity plans (PEPs), unit trusts and tax-exempt savings accounts (TESSAs), each of which can offer benefits specific to the parents' particular circumstances.
However, the real key to any investment strategy for education is timing. Your choice of investment, and ultimately the effectiveness of the underlying investment itself, will depend largely on how much planning time you have before your child starts school. The earlier you can start the planning process the better.
Unfortunately, many parents delay making decisions about funding for their child's schooling which can lead to them having to dig deep into their financial resources to meet education costs out of existing income. Termly fees currently start at around ú1,000 for day pupils at preparatory school rising to ú4,000 or more for boarding school, and are likely to increase by an average of 5% a year. Add to this the cost of school excursions and special equipment and so on, and it is easy to see how a child's education can place considerable strain on finances.
Parents who find themselves in this position can take comfort from the fact that if fees are required immediately it is often possible to restructure expenditure through loan schemes so that payment of fees can be met without over-stretching existing finances.
By far the best strategy is to plan as far ahead as possible and to implement growth investments so that they mature when school fees become due. This does mean that in the first instance you will need to decide early on which stages of the independent education process will be appropriate for your child.
Typically, a child's education falls into four age bands or a combination of them: pre-preparatory (under eight years); preparatory (eight to 11/13 years); senior (11/13 to 18) and university (18 to 21). Investments set up to meet school fees or educational costs can be geared to provide for all, or part of these stages.
Second, is to work out how much your child's education is going to cost, making allowances for the escalating cost of inflation over several years within this calculation. You may prefer, or can only afford, to raise funds for a certain period of your child's education - GCSEs for example.
Third, is to consider your attitude to risk. Most people opt for a low-risk strategy when it comes to their child's education. Indeed, funds selected by school fees planning specialists typically offer a spread of risk and strong long-term performance. Ideally set up five or more years in advance of a child starting school, they relieve parents from the need to budget for termly payments. They are also fully administered, automatically ensuring that the termly cheques arrive on an agreed date each term, relieving parents of all administrative hassle and providing peace of mind that payments will be met.
Funding from regular savings and lump sum schemes are the two chief methods available to parents who have allowed sufficient time to invest for educational costs.
With regular schemes you can transfer sums into PEPs and TESSAs which both make good use of available tax breaks. By using their maximum PEP allowance a couple can contribute up to ú18,000 a year free of income and capital gains taxes.
School fees PEPs designed specifically for payment for school fees and university costs feature built-in comprehensive life insurance protection to guarantee that the child's education is safeguarded against a parent's untimely death.
Unitised with-profit maximum investment plans have tended to replace the traditional with-profit endowment plans. Alternatively, school fee plans can be based on National Savings.
If you have capital available, and are a low rate tax payer, an expatriate or foreign national, you may be able to benefit from the likes of an offshore school fees plan in which the investment is used to buy an annuity from outside the UK. The potential return is maximised because the fund in which the money is invested accumulates free of UK taxes, and in return will provide a guaranteed level of income to pay for termly fees and expenses.
Flexibility is key to any investment plan set up for school fees. Planning in advance may mean that a few years down the line circumstances such as the choice of school, a rise in fees, or the birth of another child, might change. It is important, therefore, that all investments and their levels of performance are kept under close watch to avoid a shortfall in income and a risk to the child's education.
About the Author
Anne Feek is the Managing Director of School Fees Insurance Agency Limited (SFIA).
