Affording Private Education: A Guide to School Fee Planning

The Soaring Cost of Private Education

As parents, we all want to give our children the best opportunities in life - and for some, that means considering private education. However, the daunting cost of school fees can make this seem like an impossible goal. The average fees for a private day pupil in the UK have risen to ￡6,944 per term, while boarding school averages ￡12,344 per term according to recent data. That amounts to over ￡37,000 per year for boarders.

On top of tuition, there are extra costs like uniforms, trips, activities, resources like iPads and musical instruments, that can easily add 10% or more on top of basic fees annually. With private school costs continuing to increase, rising 5.1% in 2022 alone, keeping up with escalating fees is an immense challenge - even for affluent families earning six-figure incomes.

To make matters worse, there's the potential threat of VAT being imposed on private school fees if the Labour Party wins power at the next general election. Their proposed 20% VAT on independent school services would make fees completely unaffordable for many families.

The Need for Early Planning?

So how can you tackle this monumental expense? The key is to start planning and investing as early as possible - ideally even before your children are born if private education is a priority. Some private schools offer the option to pay all fees upfront as a discounted lump sum, providing protection from future fee inflation. However, the discount rates may not be highly compelling compared to other investment choices.

Building up sufficient funds requires a long-term, tax-efficient investment strategy. If you leave it too late and try to pay out of income alone, even high earners can be stretched extremely thin by multiplying fees for multiple children.

Tax-Efficient Investment Accounts?

One of the most effective ways to build up funds is through tax-advantaged investment accounts:

ISAs (cash or stocks and shares) - ?are extremely useful, allowing for completely tax-free growth on capital gains and income. By maximising your ￡20,000 annual allowance (￡40,000 for couples) and investing in a diversified portfolio, you could accumulate a sizeable sum over 5-10 years for school fees.

Pensions - enable you to withdraw 25% of your total pension pot tax-free from age 55 (rising to 57 in 2028) to put towards education costs. For example, with a ￡500,000 pension, you could access ￡125,000 completely tax-free for fees. Another benefit of saving into a pension is that tax relief?is provided on contributions.

Offshore Investment Bonds - allow you to segment policy investments that can potentially be assigned to your children with tax advantages down the line.?

Junior ISAs - belongs to the child and cannot be accessed until they turn 18. This strategy carries the risk that the child might use the funds for other purposes once they reach adulthood. However, it can be useful for supporting gap year or university costs. The current annual allowance for junior ISAs is ￡9,000.

The Gift of Grandparents

Don't overlook the role grandparents can play in helping to fund their grandchildren's private education. Grandparents have several options at their disposal, from direct annual gifts of ￡3,000 per grandparent per tax year (larger sums can be gifted under Potentially Exempt Transfer rules if the grandparent survives for seven years after the gift), to setting up inheritance tax-efficient trusts or family investment companies. Grandparents can also make regular gifts from their excess after-tax retirement income, exempt from inheritance tax if conditions are met.

Bare trusts, in particular, can be useful, allowing grandparents to gift assets while retaining control over decision-making until the child reaches adulthood. Since assets are taxed within the child's allowances, taxes can be minimised.

Protection Planning Is Key

As well as investing strategically, securing adequate protection cover is vital when paying for private education. Appropriate life, critical illness and income protection insurance can safeguard your child's educational future by ensuring fees can still be met if you were to suffer ill health, a loss of income or worse. This peace of mind is invaluable.

The Value of Professional Advice

Of course, every family's goals, resources and circumstances are unique. This is why seeking professional financial advice is absolutely crucial. An experienced adviser can comprehensively analyse your situation, weigh up all available options, manage investment risk prudently according to your objectives, and ultimately structure a personalised, tax-efficient plan to put your child's educational and lifelong prospects on the firmest possible footing.

Resources:-

Schoolguide

Schoolfeeschecker

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