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.
Start saving early to meet future degree costs
Sixth form students in England, Wales and Northern Ireland are this week poised to find out their A-level results and whether they've secured the required grades to take up offers for degree courses, or will have to enter the annual scramble for places through the clearing system.
Degree courses remain popular with school leavers despite the escalating costs of higher education courses since the removal of educational maintenance allowances in 2010 - a move which the Labour Party have this week committed to reverse. Participation in higher education has soared from 8.4% of school leavers in 1970 to around half today.
With the replacement of the grant system by student loans, the National Union of Students estimates that the average expenditure in 2013/14 (the latest data available) comprising fees and living costs for a degree was £23,187 in London and £21,440 in the rest of England*. While many undergraduates will seek to mitigate these costs through part-time or out of term employment and parental help, it is estimated that graduates from English universities typically leave with debts in excess of £50,000** but the real costs over time may be much higher once servicing the interest on the debt is factored in.
According to the NUS, 47% of those who graduated in 2015, the first wave of graduates to have paid course fees at the £9,000 cap, have moved back in with their parents to save money and 52% believe their degree was not worth the cost***.
University can be an incredibly rewarding experience, pave the way to improved career opportunities across a wide range of professions and, of course, be fun. But the sheer number of degrees being churned out these days inevitably means a degree no longer carries the same prestige and rarity value as it once did. Indeed it is estimated that almost 59% of UK graduates end up in non-graduate roles****, so a degree is certainly not a meal ticket to career success, but for many it does mean starting adult life with a very large debt burden hanging over them. This in turn can have a knock on impact, delaying the point at which a young adult might be in a position to get a foot on the property ladder, start a family or indeed, begin saving for the eventual, and considerable, cost of retirement.
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 to give them a head start in life. 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 £145 a month for 18 years to generate approximately £50,000. However, add in an inflation assumption of, say 2% (the Bank of England’s long-term target), and the required sum is more like £176 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 £357 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 or lower returns than the 5% assumption we have used.
Junior ISAs – A way to kick start your children’s savings
A simple way to start saving for your child could be to invest in a Junior ISA (JISA). 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 2016/17, with returns accruing free of tax and becoming accessible only when the child is 18. 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).
Somewhat alarmingly however, given the long term nature of the scheme, HMRC data suggests around 70% of Junior ISA accounts wind up in cash rather than investments which ironically is almost a mirrored image of the much criticised Child Trust Fund which JISAs replaced. While it might make sense to hold a low risk asset like cash in the period just before the child will need to access the funds, cash is a terrible place to park wealth for the long term as the real value will slowly erode with inflation. This is particularly true now that UK interest rates have been obliterated to an all-time low and inflation is notching up again.
Some parents however are reticent about JISAs, fearing their children might lack the maturity to take responsibility for a potentially sizable sum at age 18 and end up blowing their JISA recklessly. For these parents, an alternative is to utilise their own adult ISA allowances, which will soar to £20,000 a year next April, and then dip into the funds as and when required to settle specific costs such as tuition fees or rent.
Funds suitable for children’s investments
For those willing to take a very long term approach, we like the Scottish Mortgage Investment Trust. Confusingly this doesn’t invest in Scotland nor in mortgages, and behind the venerable name sits a high conviction investment portfolio that backs growth companies from across the globe such as Illumina, which is using research into DNA to develop new treatment for disease, and Baidu, the Chinese equivalent of Google. Pleasingly the trust also has very low ongoing charges of 0.45%.
For those with a shorter investment horizon of up to five years until you want to access the investments to help with university fees, there’s a strong case for selecting a low volatility investment approach, but one that nevertheless aims to stay well ahead of the meagre returns on cash. As an alternative, parents might look instead at absolute return funds – those which pursue diversified investment strategies with the aim of delivering a little bit of return, often with low volatility. The Invesco Perpetual Global Targeted Return fund has 25-30 individual investment strategies running within it at any given time, which cover equities, bonds and currencies. The aim is positive returns in all market environments on a rolling basis, aiming for returns that are 5% above interest rates but with low capital volatility, although there are no guarantees.
Tilney Bestinvest offers a Junior ISA through its Online Investment Service which provides access to a choice of more than 3,500 funds, as well as investment trusts, ETFs and stocks and shares with a minimum investment of £100 lump sum or £50 per month. For more information visit bestinvest.co.uk/juniorisa or download our guide on Junior ISAs here: /investment-tools/free-investment-guides/junior-isa
This article is not advice to invest or to use our services. Prevailing tax rates and the availability of tax reliefs are dependent on your individual circumstances and are subject to change. Investments can go down as well as up.