Get an early start to ease the fees

Early planning is the key to making the costs of school and university more manageable, says Jenne Mannion
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The Independent Online

The majority of students will return to school next week but they will not be the only ones feeling the strain. Parents have their own set of challenges in meeting the hefty cost of providing their child with a suitable education.

The majority of students will return to school next week but they will not be the only ones feeling the strain. Parents have their own set of challenges in meeting the hefty cost of providing their child with a suitable education.

The average cost of a three-year university degree now stands at just over £24,000, according to the National Union of Students. Add an extra £3,000 per year in top-up fees and the total cost could rise to £33,000.

It is not just university fees that are likely to put a strain on finances. School fees are also expensive and private education is being chosen by an increasing number of parents.

Currently, 7.1 per cent of parents choose private school fees for about 500,000 children. These fees range from £7,000 per year for day pupils to almost £18,000 for boarders, according to the Independent Schools Council. On top of this, parents need to take into account the extras, such as sports gear, music tuition, school trips and uniforms.

And fees are expected to continue rising at an alarming rate. In the past eight years, independent school fees have risen by an average of 6.7 per cent a year, outstripping the rate of inflation. According to an analysis by JPMorgan Fleming Asset Management, if this rate of fee inflation continues, parents of children born in 2004 could face a bill of up to £134,000 if they decide to educate their children privately between the ages of 11 and 18.

One message is clear. To provide the best education for your child, you will need to start saving as soon as possible.

David Elms, chief executive of IFA Promotion, a group that advocates using independent financial advice, says there are many ways to save for your child's education. The main vehicles are collective investment vehicles such as Isas, Oeics (open-ended investment companies), unit trusts and investment trusts. Other options are investment bonds, National Savings and high interest deposit accounts, or a balanced mix of these.

If you start saving early in your child's life and can stomach some risk, then collective investments or managed funds can offer a suitable route. These invest in assets such as equities, which over longer term periods tend to deliver better returns than cash-based investments. However, there are no guarantees that this will be the case and the value of equities can rise as well as fall.

Anna Bowes, an independent financial adviser at Chase de Vere, based in Bath, says: "If you start your savings programme early on in the child's life then it makes sense to opt for equity-based investments. However, if there are five or less years to go, this is far too much of a high risk strategy, and safer cash-based investments or possibly bonds are likely to be the most suitable route."

If you do opt for the collective investment route, there is a smorgasbord of about 1,600 unit trusts and Oeics and around 400 investment trusts to choose from. These range from those that invest in high risk Japanese or technology equities, to safer funds which hold corporate bonds. Because of the big variation, it is worth thorough research or consulting an IFA on the best options available to you. In most cases you can hold these within an Isa and receive the associated tax advantages.

Many fund providers tailor portfolios to suit the very purpose of saving for a child's education. Foreign & Colonial, Baillie Gifford, Scottish Investment Trust, Edinburgh Fund Managers and Witan are among investment trusts that offer savings plans specifically for children. Invesco offers its Rupert Children's savings fund, an open-ended fund.

Ms Bowes says parents can look further afield than these funds that are targeted specifically at children and should not be swayed by marketing alone.

Darius McDermott, managing director at Chelsea Financial Services, says his core recommendation for parents looking to establish an equity portfolio for longer-term savings include Invesco Perpetual High Income and Rathbone Income. "As the portfolio builds, I would add such funds as Artemis European Growth, Gartmore Govett US Opportunities and even Legg Mason Japan Equity for long-term growth," he says.

Ms Bowes says a popular choice for parents saving for their children is the Fidelity Wealthbuilder fund, which holds a portfolio of Fidelity funds.

Fidelity recently added a new dimension to this fund through its "target" range. Target funds can be used as a one-stop solution in which parents choose a target date, for example 2010, 2015 or 2020, to coincide with when they are likely to need the money. The funds hold a variety of underlying assets, mixing, for example, bonds and equities.

David Cowdell, a director at Fidelity, says: "The asset allocation of the Target funds is constantly monitored, with money shifted into less risky investments such as bonds and cash as the target date looms. This ensures returns are maximised and the risk minimised."

While investing in equities is considered a higher risk strategy, this is largely mitigated by the fact that parents tend to make monthly contributions, which smooths out the ups and downs of the stock market.

Georgette Harrison, head of UK retail marketing at F&C says: "Saving monthly can help minimise the effect of market fluctuations and eliminate the worry of investment timing."

To get a rough idea of how much you should be saving monthly to reach your financial goals, log onto the F&C's free online saving for children calculator at

Another option is Friendly societies, which are mutual organisations providing a wide range of savings, assurance, insurance and healthcare products, often tax-free.

Mr McDermott says the main drawback is their annual investment limits. Though it is possible to invest as little as £10 per month for your child, the maximum monthly investment is just £25 per month and annual contributions must not exceed £270.

The Children's Mutual is one such Friendly Society that offers a Baby Bond. The Baby Bond is written in the child's name and belongs to child, usually maturing at the age of 18 or 21.

Children's Bonus Bonds from National Savings & Investments can also play a part in school and university fee planning. It is possible to invest tax-free on behalf of a child in their own name. All returns on Children's Bonus Bonds are completely tax-free for both child and parent. Each Bond earns a fixed rate of interest for five years, and on the fifth anniversary a bonus is added. The current issue offers interest (including bonus) of 4.45 per cent.

Finally, it is worth remembering the Child Trust Fund, an initiative set up by the Government to take effect from April 2005. The Government will pay £250 into a CTF for every baby born after September 1, 2002 and a further £250 on their seventh birthday.

Strictly speaking, these are not suitable for school fees as the money must stay invested until the child is 18, but they could be a useful part of university planning. Returns from CTFs will be free of income and capital-gains tax. Parents and grandparents can donate a further £1,200 a year and receive the same tax advantages.

Fidelity was the first group to establish a CTF product, which will offer a choice of 900 funds through Fidelity's fund supermarket.


* Once you have decided on the type of investment, you must choose whose name you want to assign that investment.

* In terms of investment funds, broadly there are two options. The first is to put the fund in your child's name. This is done through establishing a Designated or Bare Trust, which means the child legally owns the assets and takes control upon their 18th birthday.

* Establishing a trust is relatively simple. When signing up to any fund, you can normally opt for this route. The plan will carry your name but it will also include the child's initials, and they gain control on their 18th birthday. Because of the age requirement, trusts are more suitable for university than school fees, but you can access some of the funds for the child's benefit before their 18th birthday if necessary.

* Tax is complex. The child has their own income tax and capital gains allowance, but if the money is gifted by the parents and the investment earns more than £100 in interest or dividends per year, that is taxable to the parents.

* Assets are the legal right of the child at 18 and there is a risk that they may not be used responsibly.

* The other option is to keep the savings plan under a parent's name and use the money when needed. So, if you have not already used your annual Isa allowance, save in this format so that all capital gains and dividends are tax-free. With collective investment vehicles you can invest up to £7,000 each year in a Maxi Isa, or split this into up to three Mini-Isas, allowing £3,000 into a cash Isa per tax year and £3,000 into stocks and shares. The Isa allowance will be reduced in 2006.

* If choosing a bank or building society account, you can establish your own account or put it in the child's name; with the latter the same tax rules apply to that of investment funds.

'This will take the financial pressure off'

Ian and Andrea Moore are making sure their four-year-old son Nathan has the best start in life.

In each year since he was born, they have taken out cash Isas and stocks and shares Isas, to their maximum allowances (currently £3,000 per person for stocks and shares and £3,000 for cash Isas) and plan to continue this strategy in the coming years, provided their financial circumstances permit.

The Moores, who live in north Somerset, expect that by doing so, they would have built up ample funds to send Nathan to private school, if they choose to do so.

Mr Moore and his wife, both information technology professionals for a major supermarket company, say they have not ruled out local schools, but plan to make that decision closer to the time and be financially prepared. Meanwhile, they are hopeful that Nathan will attend university and have a plan in place to provide their son with a good head start financially.

Shortly after he was born, they set up a savings plan for Nathan through the JPMorgan Fleming Managed Growth fund, which invests in a portfolio of JPMF investment trusts. The parents make monthly contributions of £60 to this fund, an amount similar to the child benefit at the time he was born, and plan to continue contributing until he is 18.

The Moores have put the fund into a trust so that it is assigned to Nathan when he turns 18. "This will take the financial pressure off him pursuing the career that he wants when the time comes," says Mr Moore.

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