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How to plan for spiralling education costs

School and university fees are rising so we set out how to plan for the costs.
July 24, 2015

If you want to be able to pay for your children's education, you need to start saving early. Independent school fees have risen by £471 on average over the past year, from £12,723 in 2014 to £13,194 in 2015, according to new research from stockbroker Killik & Co and the Centre for Economics and Business Research. That means average private school fees have quadrupled since 1990 and are expected to keep rising.

Fees can also be tricky to predict, particularly if you don't know how many children you want to have, when they might start going to a private school and which ones they will get into. Income-yielding investments are increasingly hard to come by, meaning you will need to build up more capital in order to generate a healthy income from your portfolio.  

The costs

The current average private day school fee stands at £13,194 and the average annual cost of boarding school is £30,369. University fees have also trebled since 2012 and could now be as much as £9,000.

Killik put the average total cost of day school over 14 years (for a child starting school at age five) at £286,000. That includes annual fees of £13,194, and £3,048 of educational extras such as sports kit, uniform, books and school trips, as well as projected future fee rises.

If a child attends state school until 11 and then private day school, the cost over the child's education to A-levels would be £189,000, according to Killik, while the cost of sending a child to private day school and then boarding school from 13 would be £468,000.

That means that you could be facing, for two children, a total sum of over £500,000 - or up to £900,000 for boarders - over the course of 14 years' education, and annual costs of between £30,000 and £70,000.

 

Long-term saving strategies

What size pot should you target?

In an ideal world you would be able to save enough money into an investment portfolio to generate the amount of school fees you need via the investment yield each year. However, you would need a pot of at least £500,000 with a 3 per cent yield to generate income of £15,000. Instead, most people will pay out from a combination of the capital sum they've saved as well as the income generated by the investments.

Darius McDermott, managing director at Chelsea Financial Services, says: "For £13,000 a year in fees, assuming the child is 1 year old today and you are looking at secondary education, you would need to save a pot of £76,000 over 10 years to be able to afford the annual fees and not get into debt. This is £500 a month assuming 5 per cent growth per year."

His calculation assumes you stop paying into the investment portfolio as soon as the child starts school and that fees rise by 3.5 per cent per year, with 2.5 per cent growth per year in surplus income.

For £20,000 per year, Mr McDermott says you would need a pot of £117,000, which works out as £750 per month to be saved over 10 years.

Danny Cox, chartered financial planner at Hargreaves Lansdown, says that a lump sum of £87,176 (saved through £500 of savings per month over 11 years) "could generate income of around £3,487 or 17 per cent of the annual fee (allowing for fee inflation each year), or could simply be used to meet the first five years' fees if capital is drawn down."

Building up capital before you need to use it is also more important than ever, with income-producing investments increasingly hard to find. You now need more capital at an earlier stage and you've got to give up more of your ongoing income to provide that capital.

 Individual savings accounts (Isas) are a tax-efficient way of saving for set goals such as school fees. Two parents both using their full allowance could save £30,480 each year. You could pick and choose your own investments using an investment platform, which could be the cheapest option, or use an adviser or discretionary manager to take charge of the portfolio for you.

 

Late-starter savers

For those with a shorter time horizon, it may be better to attempt to save as much as possible into a cash Isa in the run-up to your child starting school, alongside a stocks-and-shares Isa for the longer term. This way you could save up to pay fees for the first few years while building up a growing pot for costs after that.

Mr Cox says: "If you're saving for less than five years there's not enough time to go into the stock market, so it would be a case of saving cash in order to help meet those fees and picking the best cash Isa rate you can get, assuming you're not using it any other way."

Mr McDermott says: "Your choices are either save more or take more risk in a growth portfolio. I'd suggest save more as higher growth equals higher risk.

For a child who is currently six years old (starting private school at 11), for £13,000-a-year fees you would need a pot of £82,000, which is £1,200 savings per month. For £20,000 fees you would need a pot of £125,000, saving £1,850 per month over five years."

Boarding school

To pay for boarding school fees of £30,000 per year you would need to have built up a pot of £175,000 over 10 years. According to Mr McDemott that would mean saving £1,100 per month over 10 years. "Over five years you would need a pot of £187,000, which is £2,750 per month," he says.

 

Saving for university fees

The saving doesn't stop after school, either. University tuition fees are now as high as £9,000 per year and living costs on top of that could be even higher. The London School of Economics (LSE) advises students to budget £1,000-£1,200 per month for living costs in addition to fees, taking total annual costs to around 21,000.

Because your child won't need this money until they are 18, junior Isas (Jisas) and bare trusts are good ways to save for university costs.

The annual Jisa limit is currently £4,084 per year, and can be divided between cash and stocks and shares. From 6 April 2015 it has also been possible to transfer money from child trust funds into Jisas. The account is held in the child's name, but managed by the person who opened it, and the child will not be able to access the cash until they turn 18.

It is also worth noting that when children reach 16 they could open a cash Isa and save up to the full £15,240 into it at the same time, so your child could have two Isa allowances.

A bare trust is opened by a trustee for a child who cannot access it until they turn 18. Because income and capital gains are taxed at the child's rate this offers tax benefits, but if opened by a parent gross income on investments within the trust exceeding £100 in a tax year would be taxed at the parent's marginal rate. So bare trusts could be a good option for grand parents wanting to help their grand children meet education costs.

Mr Cox says: "Using a Jisa works very well for university fees, but not for school fees, because it can only be accessed after 18. Apart from direct gifts and payments you could invest into a designated account under a bare trust. That can be as tax-efficient as a junior Isa if managed correctly and money can be taken out to pay school fees, but ultimately the money belongs to the child once they are aged 18."

He says: "If you are going to open a designated account through a bare trust or a Jisa, then platforms are probably best because you can manage the money alongside your own and link your accounts together."

However not all platforms offer this so make sure to check first.

 

Annual school and university costs

Average annual private school fee£13,194
Average annual boarding fees£30,369
Potential annual university costs* £21,000

*Assuming LSE £12,000 per year living costs and £9,000 per year fee

Source: Killik & Co, LSE

 

Total education costs for private and boarding school

Total cost (for 1 child starting from 2015)**Target (for 2 children, one starting in 2013 and one starting from 2015)
Day school from 5* £286k£553k
Day school from 11 £189k£355k
Boarding school from 13£468k£890k (starting at 13)

Source: Killik & Co

*Based on current fees

**Plus extras and future fee rise projections

 

Funds to build up your pot

Ben Willis, head of research at Whitechurch Securities, says: "If you have 10 years you should be able to take on quite a significant amount of risk, so could put up to 80 per cent into a diverse range of equities and the remainder into a mixture of fixed-interest, property and a bit of cash too if things are volatile." He favours UK and global equity income funds, but also considers ones that take thematic approaches.

Mr Willis likes Artemis Global Income (GB00B5ZX1M70), which we count among our IC Top 100 Funds. He says: "It is quite value orientated and ultimately its manager, Jacob Tusch-Lec, is looking for companies that are cheap historically and compared with the rest of the market." He combines this with Newton Global Income (GB00B7S9KM94). He says: "It's a bit more risk aware and they tend to complement each other well.

He also likes Templeton Growth (GB00B7K6LK38 ) and for UK exposure IC Top 100 fund CF Woodford Equity Income (GB00BLRZQ513) and Trojan Income Fund (GB00B9KD9599). His thematic fund choices include Lazard Global Listed infastructure (IE00B5NXD345).

Mr McDermott says: "If you invested in the average UK equity income fund over the past five and 10 years, investing the monthly amounts suggested, you would have achieve your goal 'pots' with a bit to spare. Our favourite funds in this sector are: Liontrust Macro Equity Income (GB00B888YP40), Marlborough Multi-cap Income (GB00B908BY75) and Threadneedle UK Equity Income (GB00B888FR33)."