Swot up on how to pay school fees
Education costs are soaring but bursars and product providers have new schemes that may help
Saturday 04 May 2013
Childcare and education are easily the biggest costs for parents and with private school fees rising above inflation, you need a strong financial plan in place if you don't want to be priced out.
The number of pupils in fee-paying schools has fallen in the past few years, but this hasn't stopped average fees rising by 3.9 per cent to £4,765 a term, or £14,295 a year, in 2012/2013, according to the latest census by the Independent Schools Council. If you want your child to board, you could pay more than double this with the average fee ranging from £8,100 a term in Wales to £10,054 in Greater London.
If your biggest concern is making big lump-sum payments, specialist providers may offer some relief. A new product from School Fee Plan, for example, enables you to pay fees independently by monthly direct debit rather than termly via the bursar of your child's school. Over 10 months you pay less than £28 in interest a month for every £10,000 in fees, equating to a fixed APR of 6.1 per cent, which is cheaper than other types of borrowing such as credit card and bank loans.
Schools should also offer some form of financial assistance. You may be able to pay fees in advance, locking in today's prices to avoid the inevitable hike in later years, perhaps from remortgaging, or by releasing tax-free cash from your pension (you can take up to a quarter of your pension savings as a tax-free lump sum at age 55).
Around a third of private school pupils receive some help via scholarships, awarded to children with a talent for academia, arts or sports, or means-tested bursaries. There are usually discounts for siblings and if you're really determined, pick your job or partner carefully as parents in the armed forces or working as teachers at the same school can save around 25 per cent on fees.
It's worth noting some schools are more generous than others. For example, Christ's Hospital in West Sussex has an emphasis on helping children in social or financial need. But every school is different and it can take years before your child is due to enrol to wade through the application and selection process.
Ideally, financial planning for school fees starts from day one. Junior ISAs (individual savings accounts) are vehicles designed specifically for children, but these can only be accessed at age 18 (by your child) so you may prefer to use them for university fees, or to help them buy their first home. In the meantime you can make the most of your own ISA allowance, which is £11,520 for the 2013-14 tax year, although only £5,760 of this can be kept in cash. Starting early is key because you benefit from compounded interest over the years and if you take a punt on the stock market, a long timeframe gives you the best opportunity to smooth out any ups and downs.
"For simplicity, if you invest £100 every month into an ISA and it grows at 5 per cent a year (after charges), you would have a pot of around £15,530 in 10 years' time," says Kusal Ariyawansa at independent financial adviser Appleton Gerrard.
It's vital in any financial plan to take into account inflation, which will eat into the real value of your return. Mr Ariyawansa recommends structuring your investments in periods, which typically means moving away from equities and towards something less volatile such as fixed interest funds as you get closer to the point at which you need the money. The stock market is not for everyone, but it does offer rewards to balance out its risks and cash rates are currently a very weak weapon against inflation.
"In simple terms if fee inflation is 4 per cent then investing in cash won't cut the mustard but investing in a range of big solid blue-chip companies probably will because each year these companies pay a dividend that should match the price rises," says Robert Forbes of IFA Plutus Wealth Management. "If inflation is higher, say 8 per cent, then you'll need to consider taking more risk just to keep up with rising costs".
If you have enough equity, you could also use your property to finance schooling. Many parents use offset mortgages, placing their savings into an account linked to their home loan to reduce the mortgage interest payable. The money you've built up can be placed in the savings account where it effectively earns the mortgage rate of interest and you can pay fees on a monthly or termly basis. Remortgaging can also be a cheap way and rates are very attractive if you have at least 25 per cent equity.
Grandparents can give up to £3,000 a year without worrying about inheritance tax (IHT), whether they pay into savings accounts, trusts, old child trust funds or Junior Isas. Financial advisers can also help set up plans and trusts to cover fees, while minimising IHT. A bare trust is very simple – the assets and income are held and owned by the beneficiary so all tax liabilities for income and capital gains tax fall to the child.
Even with all these options, you need to weigh up the potential burden of private schooling against the alternatives. Tuition fees are hardly a bargain, but even at around £40 an hour they are considerably less of a strain on your finances than school fees.
Many parents also try to move into the catchment areas of the best state schools. Property prices may be inflated, but if your child does get a place, you can put the house on the market and hope there are others happy to make the same sacrifice.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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