Claire Gasgoine asks Brewin Dolphin’s Simon Blowey how parents and grandparents can meet the frightening cost of education
Education maketh man, according to the philosopher John Locke. But these days, education can also maketh the man’s parents very poor indeed.
With large school fees increases and the removal of the cap on university tuition fees, it’s never been harder to ensure your child has the education they deserve. Much foresight and planning is needed to mitigate the costs when playing this particular game.
Recent years have seen fee rises, in some cases considerably ahead of inflation; over a generation, fees have risen fivefold from an annual £3,000-6,000 in 1986, according to The Good Schools Guide, with some now pushing the psychologically significant £30,000 barrier.
Even once children are beyond school age there’s little respite; with the raising last December of the government cap on tuition fees to £9,000 a year, university costs are set to rise as well. The average annual cost of living and studying in 2010-11, according to the National Union of Students, was £15,523 outside London, and the average shortfall a whopping £7,340.
It all makes it increasingly difficult for parents to provide the kind of education that they themselves received — one reason why a growing number of grandparents are getting involved in helping to make
the numbers add up.
‘Paying for your child’s education is a long-term commitment, getting on for quarter of a century if you are starting with prep school and seeing a child through to a degree,’ says Simon Blowey, a financial planner at Brewin Dolphin.
‘There is a growing realisation that parents are not going to be able to buy a house, fund a pension and their children’s education through the kind of capital growth that we have seen in the past 40 years,’ says Blowey, who is seeing more and more clients using their savings for the benefit of their grandchildren’s schooling.
Fortunately, there can be tax advantages to using grandparents’ rather than parents’ money, as it bypasses the so-called £100 rule. Money gifted from a parent to a child that earns income of more than £100 a year is taxed at the parent’s rate of income tax; but money gifted from any person other than a parent counts against the child’s liability for income tax, and so may fall within the child’s tax-free personal allowance.
Even if you are relying on wealthy godparents or grandparents, you still need to work out how much to save — not an easy calculation, especially factoring in inflation.
At Brewin Dolphin, Blowey starts by creating a cashflow analysis, using not just predicted fees figures but also taking account of all the client’s personal circumstances: income level, capital availability, the schooling that is required and the time frame available.
‘Most younger clients will be building up a lump sum, using regular contributions into individual savings accounts (ISAs), or unit or investment trusts,’ he says.
One investment returning to favour is the 10-year maximum investment plan, particularly useful since it is designed to provide a tax-free amount at a set point in the future, giving high-rate taxpayers in particular a degree of certainty in an uncertain world.
Says Blowey: ‘Make sure you choose a new-style product, rather than one of the old type that offers more life cover than you need and charges that are hard to justify. You need a lot of research into the product.’
Older clients with estates valued at more than the inheritance tax (IHT) threshold (currently £325,000) need to consider the tax implications of using capital to pay school fees. If you outlive any capital gifts by seven years or more (surplus income should be immediately exempt), the money is not included as part of your estate when calculating IHT, and some people underestimate the potential saving. Remember that if you are aged 65, the actuarial tables typically put your life expectancy at 84.
‘Look at the Queen Mother — she was 93 when she put money in trust for her heirs, and still lived beyond the necessary seven years,’ adds Blowey.
As well as the usual savings vehicles, clients can often make tax-efficient use of offshore bonds, which can defer tax payments for the lifetime of the investment and so could be of use to those who may be moving from a higher to a lower tax bracket. Though not a get-out-of-jail-free card, a higher-rate taxpayer putting money into an offshore bond may be able to roll up savings tax free, waiting until he or she moves to a lower tax bracket before cashing the bond, or simply through assignment.
The mountain of school fees may loom large, but taking a little care can turn them into a more manageable molehill.
The opinions expressed above are not necessarily the views held throughout Brewin Dolphin Ltd. We will not accept any liability for any direct/indirect loss arising from the use of this document. The value of tax benefits depends on your personal circumstances and all tax legislation is subject to possible change.
To find out more about developing an effective financial strategy, call Brewin Dolphin on 0845 213 3883 or visit brewin.co.uk.
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