Saving by degrees: The best way to pay the children's university fees
The sudden rise in college costs is piling extra pressure on parents. Chiara Cavaglieri looks at their financial options
Sunday 22 May 2011
We were told that the £9,000 maximum tuition fees would only be charged "in exceptional circumstances" but, with the figures now in, it seems the overwhelming majority of universities are trebling their fees for 2012.
With future students facing increasing debt problems, concerned parents hoping to offer their children a helping hand will need to start early.
"Parents are under pressure to make important decisions about saving for their child's future earlier than ever," says Kate Moore, head of savings and investments at Family Investments. "In Britain, the US-style college savings fund has never caught on, but now it looks set to become a necessity."
In December, MPs voted to allow fees for undergraduate courses to rise from £3,350 a year to a cap of £6,000, up to a maximum £9,000. This will leave students facing up to £27,000 in tuition fees for a three-year bachelor's degree – and that's before factoring in accommodation expenses and other living costs. The only good news is that students can borrow to pay the fees, repaying the loans only once they are earning more than £21,000, with payments capped at 9 per cent of their salaries. However, with over two-thirds of universities planning to charge the full whack, including East London, Manchester Metropolitan and Salford, parents have every reason to be concerned.
Now that fees could treble, many parents will have to rethink their existing savings strategies. The average direct debit into a Child Trust Fund, for instance, is currently £24 per month at Family Investments, which could provide around £8,000 after 18 years if invested in a stocks-and-shares-based account.
"While this would provide a significant proportion of the current cost of tuition fees, monthly payments would have to increase by 240 per cent to achieve the new fees cap – something which is likely to be beyond hard-pressed families," says Ms Moore.
It may be obvious that putting cash away as early as possible is the most efficient way to build up a healthy lump sum, but a few calculations reveal the stark difference it will make if you start when your kids are young. Assuming an annual investment growth of 7 per cent, if you put away £140 per month for 11 years, ie from age seven, you will build up £27,511. If you start at age 12 and save for six years, you need to increase your monthly sum to £310 for a savings pot of £27,608. If you were to leave it till age 14, saving for only four years, it would take a mammoth £500 saved each month to bring the total to £27,639.
As well as getting into the savings habit early, you also need to pick the right type of investment, and using up your tax-free individual savings allowance (ISA) each year is a good place to start. For the current tax year, you can save £10,680 into your ISA, up to £5,340 of which can be in the form of cash.
There will soon be Junior ISAs, which will have a total yearly limit of £3,000 for all payments, with each child entitled to one cash and one "stocks and shares" Junior ISA which they cannot access until age 18. These are set to replace Child Trust Funds (CTFs) which were scrapped last year, although if your child has an existing CTF you and other family or friends can still deposit up to £1,200 in it each year. With both vehicles, however, it is important to remember that any money saved is theirs to spend in any way they choose.
"The problem with the Junior ISA is you have no control over what your child does with the money when they reach 18 – they might decide that spending it on more fun things is better than university costs. But if you save in your own ISA allowance, you control the capital, and, in addition, you have flexibility about how you use the money," says Ben Yearsley from independent financial adviser Hargreaves Lansdown.
Although cash ISAs are popular, historically, investing in shares offers the greatest potential to make large sums of money. There is undoubtedly greater risk, but over an 18-year period, experts say, the ups and downs of equities will easily be rewarded. For example, the total return on the FTSE All-Share index for the past 18 years has been a healthy 10 per cent, while the current best fixed-rate cash ISA from Coventry building society pays only 5 per cent, fixed for five years.
Don't forget to make the most of other tax-efficient savings, including your pension, particularly if you're a higher-rate taxpayer getting 40 per cent tax back on contributions.
"One strategy might be for a 40 per cent or 50 per cent taxpayer to pay extra money into their pension on a tax advantaged basis in the knowledge that, under current rules at least, 25 per cent of the pension fund can be drawn as a tax-free lump at age 55 to pay fees," says Jason Witcombe from IFA Evolve Financial Planning.
Outside ISAs and pensions, if you need a substantial nest egg you will generally need to look to high risk investments. According to the Association of Investment Companies, saving £50 a month into the average investment trust over the past 18 years, to 31 January 2011, would have grown to £24,000. Not to be sniffed at, but investing the same amount in higher-risk global emerging market companies would have almost doubled the total to £44,146.
Deciding how and where to invest your money should be based not only on your own appetite for risk, but also on how long you have to save.
"If you start with only four years to go, cash is really the sensible option as you haven't time for markets to bounce back, but with 12 years you can consider the full range of investments from emerging markets and equity income to the Far East and absolute return," says Mr Yearsley.
He recommends that parents with time on their side invest in a range of good quality fund managers in different areas and says that funds worth considering include Artemis Strategic Assets, Invesco Perpetual High Income, First State Asia Pacific Leaders and Aberdeen Emerging Markets.
The trick with all financial planning is to spread the risk across various companies, sectors, and risk profiles. Also, as your child gets older and closer to going to university, you should reduce the risk accordingly, which usually means moving into cash or fixed-interest investments. You should also consider the new index-linked National Savings certif-icates launched this week. These are tax free and mature in five years, paying 0.5 per cent above the retail prices index, which is currently running at 5.3 per cent. You can only invest a maximum of £15,000, but with the rising cost of living eating away at cash savings, inflation-proofing is a must.
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