Archived article: This article was correct at the time of publishing. Tax, investments and pension rules can change over time so the information below may not be current.

Financial Planning,Investment news

University fees funding – what is the answer?

Over the last few weeks many parents will have seen the euphoria of seeing their children attain the A-level grades needed to secure their preferred university course replaced by the panic of how they can provide financial support for their child's studies.

It is estimated that more than half of parents potentially underestimate the maximum amount of debt their child could be saddled with upon leaving university. According to the National Union of Students, the average student expenditure is £22,189 each year, which includes tuition fees, accommodation and living costs. For a typical three year course, that's almost £67,000. If you look at today's 10-year-olds commencing studies in 2022, they would need in the region of £83,000, assuming inflation of 2.5%.

This year’s Budget will result in many parents and grandparents soon being able to use their pensions to assist with funding university fees. With effect from next April, over-55s will be able to access their ‘money purchase’ type pensions much like bank accounts, which opens up the possibility of tax relievable university fees funding. Of course, the minimum vesting age of 55 will mean that many younger parents will be unable to raid their pensions, but this shouldn't be a problem for most grandparents in a position to help out.  Those making gifts from their pension savings will of course need to ensure that they can still meet their future income needs in retirement and monitor their Income Tax position carefully.

The Budget also announced changes to the savings rate band with effect from next April. This will see non-taxpayers, which will include many students, able to receive an extra £5,000 in savings income completely tax free. So, when combined with next year’s personal allowance of £10,500, a student with little or no earnings could have a total tax-free allowance of up to £15,500

This is a great boost for parents or grandparents who have planned to help fund the costs with an offshore bond. Rather than the parents/grandparents cashing in their bond and giving the cash to the student, offshore bonds (or parts of them) could be assigned to the student to cash-in and any tax due will be based upon the student’s personal tax position. The amount the student receives will be classified as part ‘return of capital’ (not taxable) and part ‘chargeable gain’ (the taxable part).  As chargeable gains are taxed as savings income, the student could potentially receive up to £15,500 of gains without being taxed. Over a three year course, that's up to £46,500 in gains that would have otherwise been taxed at up to 45% in the hands of the parents or grandparents.   As mentioned, the gains are often only part of the withdrawn amount too, meaning the student could receive more than enough to pay their way through university, without suffering any tax.

So, with a little help from a good financial planner, you too can attain some surprisingly good results…

See our investing for children section of the website to find out the other ways we can help you give someone a great start in life. 

 

Important information

Prevailing tax rates and relief are dependent on your individual circumstances and are subject to change.

Financial planning strategies typically involve the use of investments the value of which along with the income derived from them, can go down as well as up and you can get back less than you originally invested.

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