How to keep up with paying school fees

For most parents and grandparents, it may require years of planning and saving to make sure the funds to pay for their education do not run out – particularly when the costs of private education are rising faster than inflation.

Even if clients do not want to put their children through the private education system, making sure they can afford the costs of nursery school or private tuition means setting aside a reasonable sum of money.

Lisa Lloyd, wealth planner at Sanlam UK, points out a 2018 census conducted by the Independent Schools Council (ISC) showed a record number of pupils at ISC member schools – 529,164 pupils at 1,326 ISC schools, up from 522,879 in 2017.

As demand for private education places rises, so too do the fees.

In my experience working with clients in London and the South East, senior school fees can often exceed £10,000 per term, not including extras such as uniform and trips.Lisa Lloyd

Average fee increases this year were 3.4 per cent, the census reports, down slightly from 3.5 per cent in 2017 but still ahead of the UK’s rate of inflation.

Ms Lloyd says: “With an average term of fees now costing £5,700, educating a child privately through senior school will cost around £85,500 (assuming five years at today’s average fees). 

“Of course, those are just averages. In my experience working with clients in London and the South East, senior school fees can often exceed £10,000 per term, not including extras such as uniform and trips.”

She warns fees are only likely to increase, so planning is crucial.

“If current education inflation of 3.4 per cent persists, the average cost of private education will be nearly £26,500 per year, per child, by the time a newborn today reaches their thirteenth birthday,” Ms Lloyd sets out. 

“The total cost for five years of senior school will be over £141,000 per child. 

“That means you need to start putting aside more than £11,000 per year from birth to cover these fees (albeit assuming no growth), and the later you leave it, the more you will have to save.”

Start early

She confirms the best strategy for saving is to start early.

Myles Edwards, membership director of Foresters Friendly Society agrees: “When saving for life’s financial milestones, such as your child’s higher education, it all boils down to starting the process early so your money benefits from the time it is invested to have the chance of providing higher returns.”

Kay Ingram, director of public policy at LEBC Group, observes: “School fees inflation, like nursing homes, is higher than RPI inflation, reflecting the mismatch between supply and demand and the fact that private schools are labour intensive.”  

For that reason, most clients with ambitions to send their offspring to a private school will be looking for inflation-beating investments.

Adrian Lowcock, head of personal investing at Willis Owen, reasons the best approach is to plan.

“Get a good idea of how much you will need and don’t forget to incorporate inflation into any projections,” he suggests. 

“This is hard as school fees have generally been rising faster than inflation, so you need to build in a buffer for your expectations. Map out how much do you need each year for how many years, factoring [in that] the costs will rise for each additional child.”

He says there are a number of ways of paying for school fees and the most suitable will depend on when the parents are starting to pay them and how much money they already have in either savings or income.

1)    Investing

Mr Lowcock explains: “Before you have to pay the fees, you can start to budget for them by taking part of your salary now and using part or all of your Isa allowance for the strict purpose of paying for education fees down the line. 

“The advantage of doing this is if you plan far enough ahead you can spread the costs over a longer period, reducing the cost per year of private education. 

“At the same time the investments have an opportunity to grow, so the overall contribution from your salary is less than if you hadn’t saved or invested.”

Advisers will need to work with clients to build a portfolio that can deliver a reliable income stream.

2)    Savings

Mr Lowcock acknowledges: “If you have a lump sum already you might not need to take a risk with investing the money, although in doing so you will be reducing the savings you have left afterwards.”

3)    Cash 

As he points out: “Investing is for the longer term so you should have enough cash ready to pay any fees due in the next three years.”

4)    Salary 

“If you have the cash available from your salary and school fees are due then paying directly from your income is worth considering as it is better to avoid any withdrawal of your investments, either capital or income, if possible,” Mr Lowcock suggests. 

“Any money taken out of your savings or investments reduces the value and growth over the longer term, so could have a detrimental impact on your wealth in retirement.”

It might seem strange to mention retirement when discussing school fees, but actually clients need to keep in mind their own long-term financial needs.

Henrietta Grimston, relationship manager at Seven Investment Management, says: “Ultimately, school fees planning highlights just how important it is to factor in children into your financial plan – as well as your own aspirations, clients have to factor in their aspirations for their children. 

“Good cash flow planning is a useful way that advisers can help clients gauge what sort of impact school and university fees might have on their own finances later down the line, but also to look at the more immediate impact too.” 

She adds: “Your own retirement goals need factoring in alongside your children’s needs.”

The role of grandparents

In many cases, grandparents may want to chip in and help with the cost of putting their grandchildren through private school.

They are also quite likely to have a lump sum of money to hand.

Ms Grimston acknowledges school fees can be a useful way for grandparents to pass on wealth to younger generations.

“Not only does it reduce the estate for inheritance tax purposes, but if paid out of excess income it counts as a ‘gift out of income’ and is free of inheritance tax from day one,” she notes. 

“That said, it is important that this is documented, so clients can prove it is genuine ‘excess’ income. 

“While not enough to even scratch the school fees surface, the other option is to use the £3,000 annual ‘gift allowance’ without incurring tax, although this will have diminishing returns if you have more than one grandchild (although at least it hammers home the importance of sharing).”

Of course, much will depend at what age clients are preparing to send their children into private education. If they have their heart set on sending their children to a private primary school, then there is less time to invest any money to pay for this.

Ms Grimston adds: “If a private primary school is on the cards, investment funds would probably be ruled out, since the time frame is not long enough to ride out those stock market highs and lows – and it would be an ambitious growth target by anyone’s measure. 

“Planning for private secondary school using an investment fund is more realistic, and more risk can be taken, given the longer time horizon.”

eleanor.duncan@ft.com