Your IndustryMay 16 2019

Start saving early for one's children

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Start saving early for one's children

Many parents prioritise private education as one of the ways to give their children the best start in life.

This means that one of the costs they need to factor into their financial planning is that of school fees – and paying for private education can be expensive, running into thousands of pounds.

The Independent Schools Council’s 2019 Census Report states that the average fee is more than £5700 per term for day schools in London, which presents a significant outlay for one child, let alone families with two or three children.

The cost for the rest of the country is not far behind, with an average of £4763 across the UK, per term.

And if parents prefer boarding schools for their children, they are currently looking at an average of £11,565 per term. These figures rise substantially if parents have set their sights on an Eton education for their youngster: current fees per term for this college exceed £14,000. 

If parents prefer boarding schools for their children, they are currently looking at an average of £11,565 per term

Regardless of which school children attend, the cost means setting aside a significant sum. So what savings plans are available for parents who want to build up a fund for their children’s school fees and when should they start saving? 

Sooner rather than later

Starting as soon as possible could be ideal, according to Jason Hollands, managing director of Tilney Group in London, who says: “Families who aspire to send their child to independent schools need to plan well ahead as the costs are formidable, even for those on high incomes, and last year they increased, on average, by 3.7 per cent – well ahead of consumer-price inflation.”

While Neil Jones, wealth management and tax specialist at Canada Life agrees that being quick off the mark makes sense, he also points to other expenses which may have to be factored into planning, as he says:  “Parents have other expenses at this time, such as buying a bigger house or car, but it is ideal to start saving for school fees from the time of the birth of the child.

And the additional expense of saving for school fees can potentially be squeezed in, as Emma-Lou Montgomery, associate director, Fidelity International explains: “Even saving smaller sums such as £50-£70 per month can help, as the money has a long time to grow. The power of compound interest can make all the difference.”  

Where and how to save

Parents also must decide how and where to save for their child’s school fees, and might wish to make use of their own Isas, which have a 2019/20 allowance of £20,000: “These might be a first port of call if not already being used,” suggests Mr. Hollands.

“Premium bonds and children’s savings accounts might also be suitable,” says IFA Keith Churchouse of Chapters Financial Planning in Guildford, adding:  “Up to £50,000 can be deposited in premium bonds – they are a good vehicle for saving.”

Saving through premium bonds keeps the money in the parents’ names and grandparents are also permitted to buy them for their grandchildren.

Grandparents might be well placed to step in to fund the children’s education, as they could have significant disposable income to spare.

The FCA’s May 2019 research note Accumulation of wealth in Britain - what the distribution of wealth tells us about preparedness for retirement revealed that within the 60-69-year old group, the median total wealth is £280,000; the top 25 per cent of this group has total wealth of around £630,000; and the top 10 per cent has more than £1.25m.

Junior Isas

Junior Isas provide another way of saving for supporting children financially, which can continue well beyond their school days.

Mr. Hollands suggests parents might consider a Junior Isa for this purpose, as he explains: “Investing in a Junior Isa for your child or grandchild is a great way to build a financial ‘war chest’. 

"The proceeds could be used for all manner of purposes, such as funding the costs of a degree course, or towards a deposit on their first home.

“Alternatively, the child could remain invested beyond the age of 18, perhaps withdrawing sufficient funds each year to reinvest in a Lifetime Isa, where they will receive a 25 per cent government bonus. Lifetime Isas are designed to be specifically used towards either the first-time purchase of a property or retirement.”  

It could be particularly useful for parents to note that while they can open a Junior Isa, which has an annual deposit limit of £4368 in this tax year and manage the account on their behalf, the funds are the child’s. The Isa comes under the child’s control when they reach their sixteenth birthday, but they then cannot gain access to the funds for another two years.

However, this introduces a potential dilemma for parents, as Mr. Churchouse observes: “When the child turns 18, it becomes a standard Isa product and the child has access to the money.” This could therefore mean that the money might not be used as parents would wish.

Finally, Mums and Dads who might like to take a very long-term approach, could also consider a child pension, to kick-start their offspring’s retirement savings.

Parents can contribute up to £2,880 each tax year and if they put away the full amount, the government adds £720, bringing the total amount contributed to £3600. And while the pension transfers to the child at age 18, they can not access the money until they are well beyond their teenage years, avoiding previous parental dilemmas.