TAKING CARE OF MY FAMILY

An education in school fees

  • 26 November 2019
  • 10 minutes
  • Annual fees for private schools currently average £14,289 per child

  • That can be a lot to find from your salary

  • But planning ahead – and with a little help – could make paying them more achievable

Many parents value a private education for their children but the cost continues to increase and is undoubtedly an expensive commitment. According to the Independent Schools Council (ISC), the average cost per term for a private education is £4,763 [1] . On an annual basis this equates to £14,289. Which in turn means that you can expect to pay more than £250,000 per child if they remain in education between the ages of 4 and 18; and significantly more if your children are boarding.

Planning ahead

Funding a private education is really no different to any other form of financial planning. You simply need to establish when you will need to access the money – and how much – and structure your finances accordingly.

So how do you go about ensuring you have sufficient savings? Here are five things to consider before you take the plunge and start saving for your children’s education.

1. Starting early can reap rewards

Ideally you should start saving as early as possible. Not only could you save more because you’re saving for longer, but starting early means you benefit from compound growth. In simple terms your money earns a return in the first year. In the second year both the original investment and the first year’s return benefit from any further potential growth. And so on and so forth.

This can really boost your savings over the longer term.

Starting later means you could face having to put away much larger amounts each year because you are trying to meet the costs over a shorter period of time.

2. Tax efficiency matters

When looking to build a long-term income stream you could consider holding your investments in an ISA where all returns and interest earned are sheltered from both income tax and capital gains tax, although tax treatment depends on individual circumstances and may be subject to change in the future.

In the current tax year you can invest a maximum of £20,000.

3. Aim for returns to keep pace with rising fees

Since 2010, increases in independent school fees have averaged 3.9% each year [1]. While this is a much slower rate than the 6.6% average rise between 2000 and 2010 [1] it’s by no means insignificant. This is much higher than the general rate of inflation. It means parents looking to cover the cost of private education would’ve needed to generate returns of at least this rate to avoid dipping into other savings or their income.

Yet according to calculations undertaken for us by Moneyfacts [2], the average cash ISA account has achieved an average return of just 1.59% over that time.

By comparison a stocks and shares ISA invested in the FTSE-100 Index achieved an average return of 7.36% [3] . This figure can of course fluctuate, and it’s important to remember that past performance is not a guide to future returns. But over the longer term (periods of ten years or more) stock market returns have generally outperformed cash.

Holding a well-diversified portfolio could be suitable for a long-term investment of ten years or more. But given the unpredictable fluctuations in the values of investments, you might also want to consider holding a percentage in cash just in case. This is where a financial adviser could help you create a strategy that balances your objectives with the amount of risk you are prepared to take.

Funding a private education is really no different to any other form of financial planning.

4. Grandparents could help

If grandparents are wanting to help this can be a very effective way to help cover the cost of school fees. Not only will they be helping their grandchildren, they have the added benefit of potentially reducing their inheritance tax bill.

Each person is entitled to give away up to £3,000 a year free from inheritance tax (IHT). Making regular gifts out of income are also regarded as immediately outside the estate for inheritance tax purposes. But with the caveat that these gifts are not depriving the grandparents of their standard of living.

Any gifts above this threshold, known as lifetime gifts are potentially exempt from an estate for the purposes of inheritance tax, providing the person who makes the gift lives for at least another seven years.

Wealthy family members could also consider setting up a trust fund from which the trustees could release funds to pay school fees. This could result in no tax liability as long as any income generated by the investment is within the child’s personal allowance of £12,500.

In fact, most children can earn up to £18,500 a year without incurring tax. The £12,500 mentioned above; plus the tax-exempt starting rate for savings of up to £5,000; plus the personal savings allowance of £1,000 [4] . Any gains made must be within the child’s capital gains tax allowance –set at £12,000 for 2019/20.

A financial adviser could help you establish the right kind of trust for your family circumstances.

5. Bursaries and scholarships

A third of pupils receive help with their fees, according to the Independent Schools Council. A significant majority (85%) of this is provided directly by the schools themselves. ISC schools provided more than £860 million of help with fees in 2018, an increase of 5.6% on the previous year [1].

Many schools have extended bursary programs and more than £420 million was provided in means-tested fee assistance for pupils at ISC schools the last year.

But with bursaries averaging £5,785 a year, there’s still plenty more to pay, and to save for.

A scholarship, offered to talented children, could cover up to 20% of the school fees bill. Finally, if you have more than one child at a school, you can ask about discounts. These could also be available if you agree to pay the fees for a number of years in advance.

Independent Schools Council schools provided more than £860 million of help with fees in 2018.

Conclusion

The numbers for school fees look daunting, and reaching them can seem like an unachievable goal. But with effective financial planning, there are a number of different ways in which you might be able to fund school fees.

Many of which could be more affordable and tax efficient than trying to pay them from your monthly income.

Sources:

[1] ISC Census 2019  -https://www.isc.co.uk/media/5479/isc_census_2019_report.pdf

[2] Moneyfacts, compounded annual cash ISA returns

[3] FE Trustnet, FTSE All Share ETF fund returns, dividends reinvested, 12.11.2010 to 12.11.2019

[4] https://www.gov.uk/apply-tax-free-interest-on-savings

Always seek a professional opinion as tax rules can be complex, depend on individual circumstances and are subject to change. 

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