To fund a child's university degree, it's best to plan ahead
Students in England, Wales and Northern Ireland recently received their A-level results. For many, it was also when they found out whether they have secured a place at their choice of university. With thousands of university places still available, the opportunities for finding a course are stronger than ever. Funding a course, though, is an altogether different challenge, one that requires an awareness of the different options available for saving and investing for children.
Published on 29 Aug 20177 minute read
Written by Jason Hollands
The rising costs of university
The costs of higher education have steadily escalated since the abolition of grants and shift to a loan-based system. This is an outcome of the rapid expansion of higher education (which has seen university participation increase from around 8.4% of school leavers in 1970 to around 40% today) and the introduction of – and subsequent increases in – tuition fees.
A recent study by the Institute of Fiscal Studies (IFS)* found that graduates from English universities are now leaving with debts in excess of £50,800, the cost of which may ultimately be far higher once debt servicing costs are factored in – though a large proportion of these debts may never be repaid.
Although a degree on average should lead to higher lifetime earnings, it’s estimated that the gap between the average graduate and non-graduate earnings is narrowing. While time at university can be a personally rewarding experience, it can delay the point at which a young person can get a foot on the housing ladder, start a family or begin saving for their retirement.
For those about to embark on a degree course, careful budgeting, part-time or vacation employment and the support of parents can help mitigate the build-up of excessive debt. For more affluent grandparents, providing financial support to their grandchildren to help cover university costs could actually also help to reduce a future Inheritance Tax liability on their assets. After all, many grandparents would far sooner support their family than leave their wealth to the taxman.
Plan ahead – the earlier the better
If you wish for the children in your life to go to university, it is best to plan well ahead and start investing early and regularly. Based on an assumption of achieving a compound average annual return of 5%, net of charges, each year you would need to invest £145 a month for 18 years to generate a sum of approximately £50,000. However, it is important to realise the corrosive impact of inflation on the real value of money over time. Assuming average annual inflation of 2% – which is the Bank of England’s long-term target rate – the equivalent of £50,000 in today’s money would be around £72,000 in 18 years’ time. Achieving such a sum based on the same annual compound return assumption of 5% would therefore require a monthly investment of around £207 over the next 18 years. Although saving such sums won't be an option for most families, the important message is that every little bit helps. Based on the same return assumptions above, an investment of £25 a month would accumulate £8,730 over 18 years.
Consider a Junior ISA
A Junior ISA is a simple way to start saving for a child. Junior ISAs were introduced by the Government in November 2011 specifically to help parents build up a pot of assets for a child, giving them a financial head start in life. Junior ISAs are open to any child under the age of 18 who does not already hold a Child Trust Fund (a predecessor scheme).
Parents and guardians can invest up to £4,128 for the tax year 2017/18 (£344 a month) into a Junior ISA, with returns accruing free of tax and becoming accessible only when the child is 18 years old. At that point, they take full legal ownership of the account and it converts into an adult ISA. You can invest in a Junior ISA 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).
Although it’s likely that most Junior ISA accounts are for the long term, according to HMRC data around 70% of Junior ISAs opened so far have gone into cash accounts rather than investments – that's despite dismal interest rates and soaring stock market returns. The real spending value of cash gradually erodes over time due to inflation, which makes investing in the stock markets a more attractive choice for long-term savings.
Worried about handing teenagers a large sum of money?
Some parents may fear handing their children a potentially sizable sum at age 18, when the Junior ISA turns into an adult ISA. For these parents, an alternative might be to utilise their own adult ISA allowances, which is now a formidable £20,000 per person every tax year (£40,000 for a couple). By saving in their own ISAs, they can continue to retain full ownership and control of the assets and then use these to fund specific costs such as tuition fees or rent, or to gift sums of cash to their children each year. One risk here is that the assets are not ring-fenced legally for the child, so in the event of a divorce they could be subject to a financial settlement.
Which investment funds do you choose?
Whichever type of account a parent or grandparent ultimately chooses to help fund future education costs for their children, the choice of investments held within the account is critical. As mentioned, cash is a poor home for holding wealth over the long term. For those who can take a time horizon of at least five years, some form of exposure to the stock market is key.
As most parents are unlikely to have the time, inclination, knowledge or appetite for risk to pick individual stocks and shares themselves, the most sensible route for most will be investment funds. With funds, your investment is pooled together with thousands of other investors and invested on your behalf by a fund management company. This approach also benefits from diversification, as the cash will ultimately be invested across a wide number of companies.
When selecting a fund as a long-term investment for a child, it really does make sense to pursue a globally diversified approach rather than have a narrow focus on the UK stock market. Popular global funds among Bestinvest clients include Fundsmith Equity and Lindsell Train Global Equity, both run by successful fund managers who invest in companies from all over the world.
For a low-cost approach to investing, our clients look to tracker funds, which track the movement of a particular market (these are also known as passive investments). The Fidelity Index World fund is a popular global tracker fund.
As the child approaches the date when they may actually need to delve into their investment pot (whether to buy books or beer), it’s important to reduce the risk of their pot being exposed to a sudden stock market upset. You can do this by gradually switching out of investments into cash or lower-risk investments such as absolute return funds.
If you want to know more about saving for children, please download our guide or get in touch with us – you can call 020 7189 2400, request a call back at the top of this page or email email@example.com.
You can also open a Junior ISA through Bestinvest. Our Junior ISA is great value for money, as we charge just 0.4% a year in service fees.
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 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.