Pack more than your bags for a gap year

Students with wanderlust need to sort out the financial nitty-gritty before heading off, writes Chiara Cavaglieri

Thousands of school leavers will be about to embark on the what's becoming an almost mandatory gap-year experience. It is estimated that young travellers will have to fork out between £3,000 and £4,000 to cover the average cost of a gap year, but careful preparation is the key to curbing expenditure.

One of the most important financial purchases will be travel insurance, to protect against the costs of falling ill in a foreign country and losing possessions. "The biggest concern is that 25 per cent of those who travel are either uninsured or underinsured," says Tom Griffiths, the founder of Gapyear.com.

Insurance for gap-year travel is offered as a separate policy and will often be referred to as backpacker cover. Although annual travel policies are designed to provide a year's worth of travel cover, there is a limit (usually 30 days) on how long each trip can last. A specialised backpacker policy, on the other hand, will cover the holder for a set period of continuous travel, whether three, six, 12 or 18 months.

Most policies are sold with some kind of geographical limit, so the first step will be to check that the policy includes every country being visited. Comparison websites are useful for checking the cost of these extended policies, but it is important to look at how extensive the cover is before buying.

When it comes to the amount needed to cover potential costs, Moneysupermarket.com, the financial comparison site, recommends travellers take out a policy that would pay out £2m for medical expenses, £1m for personal liability, £3,000 for cancellation and £1,500 for baggage costs. There are policies advertising unlimited medical cover but this is largely a waste of time and not worth the extra cost. "Unlimited cover as far as I'm concerned is a marketing gimmick. Expenses don't top the £2m mark, even in the United States," says Mr Griffiths.

Also, a gap year may feature extreme activities, such as bungee jumping and white-water rafting, so it is important that anyone with an adventurous tendency picks a comprehensive policy that covers them for dangerous pursuits. Most gap-year policies will cover certain extreme sports as standard but always check the terms and conditions as there are often stipulations which may void the policy if not met.

How to access money for both emergencies and general spending is another crucial question. "The Nationwide FlexAccount has long been the current account of choice for students taking a gap year," says Pete Harrison, credit card expert at Moneysupermarket.com. "It is the only provider that doesn't make foreign currency charges on purchases and cash transactions anywhere in Europe."

Even outside Europe, the FlexAccount comes out on top and charges just 0.84 per cent per transaction, although this rises to 1 per cent in July. In comparison, the NatWest current account plus charges a 2 per cent ATM fee, plus a 2.75 per cent transaction fee. Making 10 withdrawals of €£50 from the NatWest account would therefore cost an extra £18.75 in fees.

Travellers must always inform their bank about any travel plans. Banks may freeze accounts that have any unusual activity so using an account abroad may spark some concern if they aren't aware of your plans.

It is also important to keep a note of the bank's emergency telephone number in case your credit or debit card is lost or stolen, and ensure that the bank can provide a replacement card to the countries being visited, preferably within 24 hours.

Gap-year travellers needing to use a credit card abroad should look for one of the few cards that will not levy foreign exchange fees, such as the Abbey Zero, Post Office credit card and Nationwide Gold (Europe only).

Most students will have a fairly limited credit history so young travellers may find they cannot get hold of the advertised typical annual percentage rate, or they may even be rejected for a card outright. If this happens to you, find out if you can be added as an authorised user on a parent's credit card. Alternatively, gap-year travellers can get themselves a prepaid card, which does not require a credit history and can also be a useful way for parents to help their children financially during their travels.

These cards can be loaded up in the currency of choice before leaving but, more importantly, many can also be topped up online as and when more money is needed during the course of the gap year. As there is no credit facility, only the amount that has been loaded on to it can be spent, which may come as some relief to parents worried about credit-card fraud.

Prepaid cards are also a simple way to control spending and help travellers to budget for the duration of the trip.

With prepaid cards, shopping around is essential. There are cards that charge extortionate fees for loading, so avoid any asking for a monthly holding fee or application fee. The FairFX prepaid card is one of the best for overseas purchases in Europe and the United States. It costs £9.95 initially but there are no transaction charges or loading fees, and money can be topped up quickly and easily by debit card or a bank transfer. It does charge £1 for ATM cash withdrawals but this is still less than most debit or credit cards.

Keeping in touch with family and friends back home will be a significant financial issue, particularly for long trips. There are several options open to gap-year travellers wanting to use their mobiles abroad without paying through the nose. Most of the networks offer some kind of incentive for international phone calls so this is a good place to start.

Anyone travelling this summer, for example, can take advantage of Vodafone's summer promotion which offers members of its passport scheme the chance to use their mobiles abroad and pay only what they would normally pay in the UK. This means that members can use their inclusive minutes when travelling in most European countries as well as Australia and New Zealand.

If a large chunk of the gap year is being spent in one country, a local SIM card is usually the cheapest way to make and receive phone calls. For those travelling to several countries, an international SIM card may be a better option. With these SIM cards, it is typically free to receive calls and texts in most countries and call rates are usually a fraction of the cost when compared with the charges set by network providers. T-Mobile customers, for example, would pay 70p per minute to receive and make a call in Australia and 40p per text to the UK, while those with an international SIM card from SIM4travel would pay just 49p per minute to make a call and nothing to receive a call. Another option is to get a mobile phone which can make Skype calls, which are less expensive than standard mobile calls.

The essentials: A passport is not all you need

Be covered

Do not let your children leave the country without travel insurance. Keep copies of how to claim on their travel insurance.

Consider prepaid cards

Prepaid cards are not linked to you or your child's identity or bank account. They have full MasterCard or Visa functionality and can be topped up.

Cheaper communication

Expensive overseas calls are a thing of the past. Consider Voice Over Internet Protocol (VOIP) options such as Skype for free calls. Or set up a cheap call account on your phone at home.

Reclaim income tax

People who are employed for part of the year and earn lower than the income tax personal allowance can reclaim any tax they have paid through the PAYE system. Check out www.hmrc.gov.uk.

Legal power

Power of attorney over your children's finances means you can sort out any problems from home if they lose their cards overseas or become victims of fraud.

Source: Gap year.com

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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