People come to us looking for financial advice for various reasons but one of the most common areas they ask about is giving the children in their life a head start. We spoke to our London based financial planner, Emma Sterland about the issue.
Published on 20 Jul 20187 minute read
Written by Emma Sterland
‘It’s often said that paying for a child’s schooling is an investment in their future, but as with any other investment, you need to work out how you will fund it,’ says Emma.
The average annual fees for sending a child to an independent school currently stand at £17,232*. This means that the cost of sending a child to a private school for their entire school education to the age of 18 could be around £254,008**. Even if they only attended an independent secondary school, it’s still likely to cost a staggering £164,151**. With the cost of school fees rising faster than wages and savings growth, it’s more important than ever to consider how you will pay for this continually growing expense.
On top of the fees, there are additional expenses that should be taken into consideration. The ongoing costs of uniforms, school trips, after-school and school holiday clubs, extracurricular activities, hobbies and additional tutoring can add up to many thousands of pounds per year. Including these in your plan to cover the costs of education is essential.
Grandparents who have previously put their own children through private schooling may want to do the same for their grandchildren. ‘I have many clients who want to do this but the problem can be that the cost of school fees has risen dramatically in the years since they sent their own children to school,’ says Emma. ‘For some people, what they may have been able to readily afford in the past might not be so easy to pay for today, especially if they are now retired.’
Many parents also look to fund their child’s education themselves. ‘We often see clients with a small child or baby on the way coming to us for advice,’ Emma explains. ‘While it would be reasonable to assume that their salary will increase over time, the amount and frequency of these rises can be unpredictable and the parents are often looking to fund the child’s education alongside a substantial mortgage – they need to establish how they will continue to pay for both.’
The first step is to establish at what age the child will attend a private school. Will it be right from the start of their education at the age of four, later at seven or perhaps when they enter secondary school at 11?
Once this is agreed, it could be wise to speak to a financial planner to see how they can help you prepare for this expense. At Tilney, our experts use cashflow modelling to forecast your future finances. Cashflow modelling involves working with your financial planner to build a complete picture of your finances now and into the future. With the help of powerful computer software, they will analyse details of your income, outgoings, savings and other assets. They can then consider your future goals, like paying for a child’s education, and create a projection of your finances. Given the statistics available on the ever-increasing cost of school fees, we can realistically estimate what your future expenditure will be.
We will then assess this in conjunction with your current financial situation and look at how many years you have until the child starts school to predict how much you can afford to save in this timeframe, while taking inflation and investment growth into consideration. ‘This then feeds into the concept of investment risk,’ Emma explains. ‘If we know the child is not going to attend a private school until they are 11 and they’re a young baby now, there is an 11-year period before the money needs to be drawn on. This means that it might be possible to take a higher level of risk to increase the potential investment returns.
Essentially, it’s the same as any other income planning strategy. As we approach the end of the given period, we need to make sure you have a balance of cash and investment funds. If the child is about to attend a private school immediately, the level of risk we would advise you to take may be different in order to make sure you have this balance.’
We can use the results of the cashflow model to help you put an effective and sustainable plan into place. In addition to the main school fees, we will take into account the potential extras outlined previously. You might be able pay for everything, or you may need some additional help. ‘I often see parents and grandparents working together to fund all elements of schooling,’ Emma says. ‘One party might be able to pay for the fees while the other can afford to pay for all the extras. By working with everyone involved we can help you come up with a plan that works for all of you.’
While working together is important, Emma suggests that if grandparents are paying for the school fees, it is best that they do this directly rather than going through the parents. ‘There are many reasons for this with the main one being tax-efficiency,’ she says. ‘A financial planner should discuss elements such as the child’s personal allowances and understand the parents’ tax position to ensure that no additional, and perhaps unnecessary, tax is paid.
‘Also, if the money is a gift from the grandparents, it will fall out of their estate for Inheritance Tax purposes if they survive for seven years after the gift is made, potentially reducing their Inheritance Tax liability. I sometimes meet grandparents who have surplus income that they use to help towards school fees and this is also Inheritance Tax-efficient.’
Emma points out that while there are many general savings vehicles designed specifically for children, it is important to be aware of issues surrounding access. For example, while investing in a Junior ISA is considered an effective way to save for a child’s future, only the child can access the money within it when they are aged 18. Therefore, if your aim is to fund their schooling, a Junior ISA is not the best method to use.
‘Often, I will work with clients to set up a bare trust on behalf of the child to fund their education,’ Emma explains. ‘It’s a really simple form of trust. Any of the parties involved can be named as trustees and have full control over where the money is invested on behalf of the child. With professional advice, these trusts are straightforward and cost-effective.
‘I work with the trustees on an ongoing basis to ensure that the contributions and investments contained within the trust continue to meet the overall aim of providing enough money to pay for the child’s education.’ Although at first glance saving and investing for a child’s education might seem complicated and daunting, it can be simpler than you think.
If you want to know more about how you can plan to pay for a child’s schooling, the first step is to speak to your financial planner. They will be able to answer any questions you have and advise you on the best way to proceed. If you don’t have a financial planner, we would be happy to help. Call us on 020 7189 9999 or email us at firstname.lastname@example.org.
*Source: Independent Schools Council Annual Census 2018. The overall average fee for an independent school per term is £5,744
**Using an assumed figure of 4% school fee inflation (this amount is higher in some regions)