How to make school sums add up
Huge rises in fees means an independent education, needs even more planning than previously. Chiara Cavaglieri reports
Sunday 09 September 2012
If you dream of a private education for your offspring, as they settle back into school, time and strategic approach to saving and investment is vital.
At the top end, independent schools can cost more than £30,000 a year but across the board prices have risen nearly twice as fast as inflation in the past decade. The average annual private school fee is up from £6,820 in 2002 to £11,457 in 2012, according to new figures from Lloyds TSB Private Banking.
The economic downturn has had a huge impact, with the average fee growing by 19 per cent in the past five years. Parents in the South-west and London have faced the biggest increases with fees rising by 79 per cent in the past ten years. Overall, fees are highest in the south, costing on average £13,359 in London and £12,879 in the South-east, almost a third lower than the north (£9,171) and Scotland (£9,816).
These figures may seem insurmountable, but with time on your side, there are a number of vehicles designed to help you build up a decent sum. Junior ISAs (individual savings accounts) are great for university education, but will be of little use for private school fees as there is no access until age 18.
Instead, make the most of your own, more generous ISA allowance, as a straightforward, tax-efficient place to start saving. First, you'll need to decide whether you want a cash, or a stocks and shares ISA; in the current tax year you can save £11,280 overall, with no more than £5,640 in cash and the rest in an equity ISA.
Most advisers pick stocks and shares for investors with a long timeframe, over which the ups and downs of the stock market will smooth out. And, with the appropriate nod to the level of risk involved, investing over the long term could be the ideal opportunity to go for equities, which have historically significantly outperformed fixed-income vehicles.
Equities could allow you benefit from superior growth potential in the long term, making the most of high-risk, high-reward sectors such as emerging markets. Then, as your child approaches adulthood, you can gradually reduce the risk, perhaps by moving into bond funds and cash to lock in any gains you've made.
"Savings can be kept in an ISA to maximise tax-efficiency, possibly with some of it invested in equities, if it is earmarked for fees five to 10 years down the line," says Jason Witcombe of independent financial adviser Evolve Financial Planning.
Mr Witcombe encourages clients to look at school fees as just another expense, albeit a big one, and to be realistic about how these fees will rise over time. "I'm not a big fan of investment products that are marketed as school fees schemes as I really don't believe that there is a one-size-fits-all solution to funding for education costs," he says.
Often, it is grandparents who help fund their grandchildren's education which also has the advantage of reducing inheritance tax (IHT) liabilities.
You can give up to £3,000 away a year as well as make "regular gifts out of surplus income" outside of your estate. "Other gifts are 'potentially exempt transfers' which means you must survive seven years for them to be free of IHT," says Jason Hollands of IFA Bestinvest. "Ultimately, those grandparents likely to be liable to IHT should ask themselves who would they sooner their money be left to, their grandkids or the Chancellor?"
Parents and grandparents can also use trusts to earmark assets and make use of IHT allowances. The cheapest and most common trust for school fees is known as a bare trust, which can be set up by anyone for a specific child or children with trustees withdrawing money as necessary. Those setting up a trust will not incur an immediate tax bill (unless it is above the nil-rate band, currently £325,000) and, as long as they live for seven years, the gift normally falls outside of their estate for tax purposes.
"Unit trusts under a bare trust arrangement normally pass to the child at age 18, however access can be taken earlier for the child's benefit, and school fees falls within this category," says Danny Cox from IFA Hargreaves Lansdown. There are administration costs to consider, however, which vary widely depending on the complexity of the trust.
Educational trusts are another option, particularly where there are several siblings. These tend to be discretionary trusts which allow more flexibility and control over how, when and to whom benefits are paid, with the certainty that these funds will be issued for the purpose described. "Generally, upwards of £50,000 is required for them to be cost effective. The underlying investments are usually shares or funds," says Mr Cox.
When picking a school it is worth investigating bursaries and scholarshis. If your child has an academic, sporting, artistic, or musical talent, a scholarship may reduce the fees by anything from 5 to 50 per cent.
"The big change in scholarships in recent years has been schools moving to means testing of awards. This is great if you're the poor parent of an Einstein or Jessica Ennis. Not so good if your income is more on the average side or just above," says Janette Wallis from The Good Schools Guide (goodschoolsguide.co.uk).
However, she says you can still hunt down scholarships available for niche sports, while some schools also offer occupational discounts to members of the Armed Forces, the Foreign Office and the clergy. And one school, Charterhouse, even offers a scholarship for "sons of lawyers". thanks to a generous descendant of Sir William Blackstone.
Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk
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