Archived article: This article was correct at the time of publishing. Tax, investments and pension rules can change over time so the information below may not be current.
Record number of university places may lead to record graduate debt burden
With sixth-form students in England, Wales and Northern Ireland finding out their A-level results this week, the UCAS admissions service has confirmed a record number of students have been accepted on university courses with 409,000 places already confirmed ahead of the scramble through the clearing system.
But with ever more teenagers heading into higher education, alongside this comes the burden of funding the costs of a degree. The costs of a higher education have escalated in recent years, with the National Union of Students estimating that the average expenditure in 2013/14 (the latest data available) comprising fees and living costs for a degree in London was £23,187 and £21,440 for the rest of England, meaning the cost of a three year course is likely to be in the region of £70k once inflation and interest costs are factored in.* The satisfaction of graduating from university with a good degree can be severely dampened by the spectre of debts that could take years to pay off at a time when a graduate might also be grappling to get on the property ladder or contemplating starting a family. While most parents will no doubt expect their child to accumulate some debt over their time in higher education, many will still be surprised by the great size of these debts. In fact the Association of Investment Companies recently released research suggesting that parents, on average, underestimate the size of their child’s debt on leaving university by over £26,000.**
Parents and grandparents who aspire for their children or grandchildren to eventually go on to university should take heed of this and plan well ahead. The key factor is to start saving as early as possible. Based on an assumption of achieving an average return of 5%, net of charges, each year you would need to invest £200 a month for 18 years to generate approximately £70k. However, add in an inflation assumption of, say 2% (the Bank of England’s long-term target), and the required sum is more like £280 per month for 18 years. To illustrate the impact of delaying however, if you only start accumulating a savings pot 10 years ahead of the date that the funds are required (when the child is eight) then the annual sum to be saved will need to be around £540 per month (based on the above return and inflation assumptions). There is of course a good deal of uncertainty in these assumptions, as inflation (particularly in education costs) could be much higher, equally you may find markets deliver higher returns than the 5% assumption we have used.
Junior ISAs – A first port of call… but not the whole solution
A simple way to start saving for your child could be to invest in a Junior ISA. These are open to any child under the age of 18 who does not already hold a Child Trust Fund. Parents and guardians can invest up to £4,080 for the tax year 2015/16. While certainly a neat sum, if you have begun to save late in the day this could prove insufficient in itself, and you may need to consider additional savings plans such as use of bare trusts. Investing into a JISA can be done either through regular monthly savings or through lump sum investments into an account that can hold cash or stocks and shares (or funds investing in stocks and shares). All returns accumulate free of tax on gains and Income Tax as the value of the Junior ISA builds over time. At age 18 full ownership of the account passes to the child, enabling them to either withdraw funds or continue with the investments as an adult ISA.
The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This press release does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers. Past performance is not a guide to future performance.
Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. Different funds carry varying levels of risk depending on the geographical region and industry sector in which they invest. You should make yourself aware of these specific risks prior to investing.
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