Investments, income, inheritance or savings? What’s the best way to financially plan for school fees?

No sooner had the twins returned home for the summer holidays than the bills for the autumn term school fees arrived in the post. This was with the inevitable news that they will again rise in 2019. Since 1994, private school fees have risen more than the rate of inflation and they show no sign of slowing down!

According to the Independent Schools Council (ISC), the average annual cost for private school fees is now approximately ￡15,000 a year for a day pupil and ￡34,000 a year for a boarder.

I asked Lisa Lloyd, an experienced wealth planner at Sanlam for her advice on funding school fees:

“If you want to secure a private education for your offspring then it truly does pay to get a head start with saving and investing, even if children are just a twinkle in the eye or a babe in arms. Most people underestimate the cost of school fees and just assume they will be able to meet the payments from monthly income. Life however doesn’t always go to plan! There could be a hundred reasons why income doesn’t stay consistent! For instance, a family might go down to one salary, have more children than they originally planned for, decide to make a career change or invest time in starting their own business. All of which could make meeting termly payments difficult.” 

To financially plan for school fees, it is essential to seek advice to work out what route is best for your personal circumstances as all come with varying pros, cons and degrees of risk. Cash used to be king but now it is a poor savings vehicle because interest rates are low, and inflation is 3 per cent, so the value of savings is falling. Don’t also forget to check out all the bursary and scholarship options available at your school of choice!

·     Get tax savvy: The ISA allowance per person for 2018/19 is ￡20,000. By investing the maximum amount permitted in a stocks and shares ISA and selecting a well-managed fund, it’s tax free status makes it an efficient and flexible way to save for school fees. Historically returns from equities have far outperformed cash. If, for example, you start saving ￡7500 per year from the day your child is born, and assuming you achieve an annual return of five per cent on your investment, you will have saved nearly ￡1450,000 by their 13th birthday. If you can save the maximum amount of ￡20,000 a year, you will have saved over ￡370,000 by the time they reach senior school. 

·     Stocks and shares: If you have money left over after investing in an ISA but don’t have the time to manage stocks and shares yourself then a unit trust or index tracking fund can be cheap, and money is easy to access. To maximise returns and reduce risk, our experts advise holding a well-diversified portfolio, to include UK and international equities, fixed income and commercial property.

·     Gifting from grandparents: If the grandparents feel strongly about private education then you could raise the idea of them contributing towards school fees. Grandparents could use it as a way to reduce the value of their estate for inheritance tax purposes. If the amounts given are under ￡3,000 per grandparent annually, they fall within the annual exemption from inheritance tax, and the gifts will have no inheritance tax consequence. Regular gifts can be also be made from surplus income or lump sums, if the donor survives seven years after making the gift. Grandparents can also use a trust to gift money, which gives them control over how money is spent and can potentially lessen their IHT liability. However, this is a complex solution and professional advice is essential.

·     Pensions: Parents over 55 years old could also consider drawing a tax-free lump sum worth a quarter of their pension but be wary that this isn’t going to compromise retirement plans.

·     Personal loan or remortgage: It is not uncommon for parents to use offset mortgages or to even remortgage as with today’s low mortgage rates, this may be a cheaper option than getting a personal loan. You will pay a higher amount in the long term because of interest payments but it might be the only option if you haven’t planned ahead for school fees.

·     Pay upfront: If you have a lump sum available then some schools offer a discount if you pay fees in advance. Again, with cash being a poor savings vehicle then the discount received may well outweigh any interest you would have made.

I’m of the mindset that investing in my children’s education is also an investment in my future. Surely if I’ve spent a fortune schooling them then that’s my ticket to a five-star, gold plated nursing home in my later years. Hmmmmm… I must start dropping this into conversation…

Our private office works with you to understand every aspect of your wealth and ensure it meets your lifestyle expectations and requirements. To find out more email us: [email protected]

Sanlam advises that individuals should seek financial advice before making any investment or financial commitment.

Please note the value of investments and any income from them can fall and you may get back less than you invested. For information only and not to be considered financial advice. If you want help with your investment choices, we suggest you take financial advice, such as from a Sanlam financial adviser.