Financial Planning

To fund a child's university degree, it's best to plan ahead

Students in England, Wales and Northern Ireland recently received their A-level results. For many, it was also when they found out whether they have secured a place at their choice of university. With thousands of university places still available, the opportunities for finding a course are stronger than ever. Funding a course, though, is an altogether different challenge, one that requires an awareness of the different options available for saving and investing for children.

The rising costs of university

The costs of higher education have steadily escalated since the abolition of grants and shift to a loan-based system. This is an outcome of the rapid expansion of higher education (which has seen university participation increase from around 8.4% of school leavers in 1970 to around 40% today) and the introduction of – and subsequent increases in – tuition fees.

A recent study by the Institute of Fiscal Studies (IFS)* found that graduates from English universities are now leaving with debts in excess of £50,800, the cost of which may ultimately be far higher once debt servicing costs are factored in – though a large proportion of these debts may never be repaid.

Although a degree on average should lead to higher lifetime earnings, it’s estimated that the gap between the average graduate and non-graduate earnings is narrowing. While time at university can be a personally rewarding experience, it can delay the point at which a young person can get a foot on the housing ladder, start a family or begin saving for their retirement.

For those about to embark on a degree course, careful budgeting, part-time or vacation employment and the support of parents can help mitigate the build-up of excessive debt. For more affluent grandparents, providing financial support to their grandchildren to help cover university costs could actually also help to reduce a future Inheritance Tax liability on their assets. After all, many grandparents would far sooner support their family than leave their wealth to the taxman.

Plan ahead – the earlier the better

If you wish for the children in your life to go to university, it is best to plan well ahead and start investing early and regularly. Based on an assumption of achieving a compound average annual return of 5%, net of charges, each year you would need to invest £145 a month for 18 years to generate a sum of approximately £50,000. However, it is important to realise the corrosive impact of inflation on the real value of money over time. Assuming average annual inflation of 2% – which is the Bank of England’s long-term target rate – the equivalent of £50,000 in today’s money would be around £72,000 in 18 years’ time.

Achieving such a sum based on the same annual compound return assumption of 5% would therefore require a monthly investment of around £207 over the next 18 years. Although saving such sums won't be an option for most families, the important message is that every little bit helps. Based on the same return assumptions above, an investment of £25 a month would accumulate £8,730 over 18 years.

Consider a Junior ISA

A Junior ISA is a simple way to start saving for a child. Junior ISAs were introduced by the Government in November 2011 specifically to help parents build up a pot of assets for a child, giving them a financial head start in life. Junior ISAs are open to any child under the age of 18 who does not already hold a Child Trust Fund (a predecessor scheme).

Parents and guardians can invest up to £4,128 for the tax year 2017/18 (£344 a month) into a Junior ISA, with returns accruing free of tax and becoming accessible only when the child is 18 years old. At that point, they take full legal ownership of the account and it converts into an adult ISA. You can invest in a Junior ISA either through regular monthly savings or through lump sum investments into an account that can hold cash or stocks and shares (or funds investing in stocks and shares).

Although it’s likely that most Junior ISA accounts are for the long term, according to HMRC data around 70% of Junior ISAs opened so far have gone into cash accounts rather than investments – that's despite dismal interest rates and soaring stock market returns. The real spending value of cash gradually erodes over time due to inflation, which makes investing in the stock markets a more attractive choice for long-term savings.

Worried about handing teenagers a large sum of money?

Some parents may fear handing their children a potentially sizable sum at age 18, when the Junior ISA turns into an adult ISA. For these parents, an alternative might be to utilise their own adult ISA allowances, which is now a formidable £20,000 per person every tax year (£40,000 for a couple).

By saving in their own ISAs, they can continue to retain full ownership and control of the assets and then use these to fund specific costs such as tuition fees or rent, or to gift sums of cash to their children each year. One risk here is that the assets are not ring-fenced legally for the child, so in the event of a divorce they could be subject to a financial settlement.

Another option for investing for children is to save the money into a trust. Trusts let you keep control over how and when the money can be spent. For example, the money can only be accessed to pay for accommodation or tuition fees. There are many different types of trust, some of which allow you to continue benefitting from the money, so it pays to speak to an expert if you are interested in going down this route.

Speak to an expert

For more information on the different ways to save for a child, speak to your financial planner or book a no-obligation initial consultation today. Simply complete this short form, call us on 020 7189 2400 or email contact@tilney.co.uk.

 

*https://www.ifs.org.uk/uploads/publications/bns/BN211.pdf

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