The cost of school fees continues to soar and, sadly, rarely in line with any annual increase in salary. The average cost for private day schooling currently stands at around £14,000 per annum, a figure that can easily be doubled for boarding fees.
It is therefore essential to plan ahead, considering the most tax efficient way to cover the cost of private education – ideally as soon as you have children! When it comes to saving for school fees, you can’t start planning soon enough.
What is a school fee plan?
School fee plans are investment and saving options designed to help parents and guardians pay for school and university fees when the time comes.
They can be a sensible and tax efficient way of forward planning, helping to build up the necessary funds and minimise the financial burden well in advance.
While school fee plans can be tailored to your individual circumstances and needs, there are generally three main options to choose from:
Capital schemes: these types of scheme involve making an initial lump sum investment in a fund that usually guarantees that you’ll at least get back your original investment. The earlier you invest the more chance you have of making money on the investment.
Income or regular savings schemes: here you will need to make regular monthly or annual payments into a savings scheme. Again, the earlier you start saving the more money your investment could earn.
Combined schemes: as the name suggests, this type of scheme is a combination of the first two. You combine an initial lump sum investment at the start of the plan, with regular or even irregular top ups over time.
When should I start a school fee plan?
The stage at which you start a school fee plan depends on how much you will need to fund your child’s education and at what age you are thinking of commencing their private education.
A financial investment generally needs around a minimum of five years to grow, although the longer you can give your money, the better. You will also need to factor in the likely annual increase in school fees, say 4% a year, to ensure that your school fee plan covers for this.
What risks are involved with school fee plans?
A school fee plan often comes with some measure of protection for your investment, although different plans will offer varying degrees of protection.
However, as with all investments, there is no absolute guarantee of how much you will get by way of a final financial return. Indeed, the value of your investment can fall as well as rise.
For school fee plans without any financial guarantee, you run the risk of your return being less than your initial investment, resulting in insufficient funds to cover the cost of your child’s education.
Further, while school fee plans are generally designed to be tax efficient, there may be financial penalties, administrative fees and tax implications if you cash in your plan early.
Before deciding on a school fee plan, you should talk to the provider and make sure you understand what measure of protection is in place. You should also inquire about any set up and annual management charges involved.
What alternative funding options are available?
Given the potential risks involved in school fee plans it is always worth considering alternative funding options. It is also possible to combine these options so as to cover the total cost of school fees.
You could consider using your annual individual savings account (ISA) allowance specifically for school fees, allowing tax-free contributions of up to £20,000.
Other longer-term savings products are also available such as flexible savings plans. These can be beneficial for those of you who wish to retain the ability to access funds without financial penalty.
Under the new rules, anyone aged 55 or over can take up to 25% of their pension pot as a lump sum payment, tax-free. Anything over and above this will be taxed as if it were your salary at your income tax rate.
Thanks to these pension freedom rules, a suitable proportion of your pension pot could be used to fund your child’s school or university fees.
Provided you have sufficient equity in your family home, a minimum of 25%, you may be able to remortgage your property, releasing some of that equity to help pay for your child’s school fees.
You could then opt to release a proportion of your pension fund tax-free at 55, using this to help pay off your outstanding mortgage.
In the event that grandparents or other relatives are willing and able to contribute toward your child’s school fees, it is possible to gift a lump sum of up to £3,000 per annum free from inheritance tax.
This annual gift exemption can also be carried over from a previous year into the next, and can be used to top up the cost of school fees on a yearly basis.
A trust is a legal arrangement where money or assets can be set aside by grandparents or other relatives to help with the cost of your child’s education, in some cases without any inheritance tax implications.
In particular, a bare trust can be used by relatives wanting to contribute more than the £3,000 permitted under the annual gift exemption.
Under this type of trust, the child is the beneficial owner and becomes automatically entitled to the trust fund once they reach the age of 18, but until then, the trustees can withdraw money for the benefit of the child, for example, to pay for school fees.
Typically there is no tax to pay as long as income generated by the investment is within your child’s personal allowances, and any gains made are within the child’s capital gains tax allowance.
Many of the larger private schools offer advance payment schemes. While these require parents to pay the school fees up front as a lump sum, the capital is invested by the school and will result in parents being offered a percentage discount on fees, typically anywhere between 3% and 5%.
You should contact the school in question to make inquiries about what schemes they offer and the available discount rates.
Your child may be eligible for a scholarship or bursary from their school, although these are generally mean-tested. That said, there may be other financial awards available to children who are particularly gifted in a certain area, such as music, art or sport, regardless of household income.
Again you should contact the school in question to see what scholarships, bursaries and awards are available.
It is never too soon to think about school fee plans and other funding options. The cost of private school fees can be significant, but spread over time these can be affordable.
Indeed, if you sensibly invest your finances early enough, you can accumulate sufficient funds to cover the cost of your child’s education, from primary through to university.
When considering whether to invest in a school fee plan or any other financial product, you should always speak to an independent financial adviser.