What are the best ways to cover the cost of education and are there any other points I need to think about before making this commitment?
With average annual fees of £36,000 for a boarding school and £15,192 for a day school*, careful planning is required if you are going to commit to paying towards these costs. It’s important to know what you can afford to pay in the long term and the best ways to make this payment.
Since March 2020, most children in the UK have been through a significant period of disrupted schooling. Inevitably, some have fallen behind in their learning and missed out on opportunities. Alongside the many who are already planning on private education, this has prompted others to consider private education as an option, as people are attracted by the facilities, resources and smaller class sizes offered by many private schools.
The Independent Schools Council has reported the lowest rise in average private school fees since 1974 (1.1% on average*), which has made some people consider if they are now able to afford these costs. It is important to remember that while there may not have been an increase due to inflation this year, this is not the norm and average fees usually tend to rise significantly each year.
One of the first steps to seeing if you can afford to send a child to a private school is to think about whether you are planning on paying for the education entirely on your own or with the help of others. In many cases, one or two individuals may struggle to cover the costs so they ask other people, such as grandparents, to make a contribution if they can.
In the short term, it can be easy to see if you can afford the fees in the immediate future. It is sensible for everyone involved in covering the costs to look at their income and their outgoings alongside the current fees for the school you want the child to attend.
Calculating this over the longer term can be less clear, as you cannot say for certain how much the fees will rise by or what impact inflation will have on the spending power of your income and savings. Sophisticated cashflow modelling software can take the uncertainty out of this by forecasting how much you could afford to provide for a child’s education. It takes into account your current financial situation and your financial goals (in this case, paying for an education) and allows for growth in your savings, investments and income along with increases in inflation and school fees to see how far your money could go both now and in the future.
I regularly work with families as a whole as well individuals when it comes to paying for a child’s education. I work with each contributing person and run a cashflow model to see exactly what they can comfortably afford.
The parents who I speak to who are looking to send their child to a private school tend to pay for the costs directly out of their income and top up any shortfalls from their savings.
Some people start saving into a dedicated account for a child in order to pay for their education. There are a number of savings and investment accounts designed for the benefit of children, but it is important to bear in mind that the proceeds of many of these cannot be accessed until the child’s 18th birthday. This renders them unsuitable for the purpose of paying for primary and secondary education.
Bare trusts are often used when grandparents or someone else who is not the child’s parent is paying towards a child’s education. Setting up a bare trust is often the simplest and most efficient way of saving towards a child’s education. The trustees have full control over the trust and make important decisions such as where the money is invested. Usually the child’s parents are appointed as the trustees, but if a grandparent wants to remain involved with the investment decisions, they may also be named. As the owner of a bare trust is the beneficiary (which in this case would be the child), the child’s income Tax and Capital Gains Tax allowances can be applied, making them extremely tax-efficient.
If you are committing to paying towards a child’s education, it’s important to be confident that your own income is secure, whether you’re a working parent or a retired grandparent. The pandemic has highlighted for many people just how unstable their income is. Think about what would happen if your income was reduced or stopped altogether. Could you take the money for the child’s education from another source?
The cost of private school fees and the overall cost of a child’s education are very different things. Essentially, the school fees are the basics, but there are a number of extra costs to take into consideration. Although you may not end with a chart-topping musician or Olympic gold medallist, music and sports lessons are often considered important to a child’s development – but they come at a cost. The costs of school trips, additional tuition and any other extra-curricular activities also should be taken into account.
If more than one person is paying, it might be the case that you agree to cover the costs of the fees yourself and someone else pays for all of the extras.
Considering how long you have until you start paying towards a child’s education is extremely important. The sooner you can start saving money towards these costs, the better. Even if you are planning on paying for the costs out of your income as they arise, if you can prepare in advance, you are far more likely to end up with an emergency fund which can be used to cover the fees should your income be reduced or stop at any point in the future.
Many people, however, cannot cover the costs from their income as the bills come in and instead have to make preparations long before the child starts school. If the child will only be attending a private secondary school, there is a longer timeframe involved and it might be possible to take a greater level of investment risk with the money being set aside. On the contrary, if the child will be starting their private education at the age of four or five, there are potentially fewer years before any investment savings will need to be drawn upon and it may be sensible to reduce the level of risk taken to allow for this shorter period of time.
Before sending a child to a private school, you need to think about what would happen on the death of the person who is paying for or contributing towards these costs, or if they were diagnosed with a serious illness and could no longer work (if they funded the costs of education from their salary). The last thing most people would want to do is to disrupt the education of a child at what could already be an extremely difficult time.
If the costs are being covered by a trust, the death wouldn’t have any impact as the proceeds would continue to be paid as usual. If they are paid via an income, this could be problematic, especially when there are blended families involved.
For example, say you were covering the cost of your grandchild’s education out of your income. You are married for the second time and you and your partner have your own children and grandchildren. Then you unexpectedly die. Your assets are wrapped up into a trust for the benefit of your husband or wife, who understandably want to protect themselves as they have lost a substantial amount of income on your death. There is no longer any source of payment for your grandchild’s education.
Luckily, there are two main ways to avoid this. Firstly, a provision for a child’s education can be written into your Will. Secondly, you could take out a life insurance plan or critical illness cover for the estimated amount of total cost of the child’s education and write it into trust for them.
Many people have more than one child, so if you are paying for or towards the cost of education for one child, it’s probably advisable to prepare financially for each child. Although some private schools offer a discount on fees for siblings, the cost is still likely to be substantial and will require forward planning.
When discussing school fees with grandparents, we often factor in making provisions for more than one grandchild and this is agreed with the parents. For example, the grandparents may be able to pay for the education of two grandchildren per adult child of their own. If their adult children have more than two children, they will need to cover the costs of education themselves for these additional children.
There are a number of potential Inheritance Tax benefits to paying towards a child’s education. While this might not be a primary consideration for parents paying for their child’s education costs, it can be very important to grandparents or older people making contributions. Any payment made from your capital could be classed as a potentially exempt transfer, provided that you survive for seven years after making the gift. If you are paying for these costs regularly out of your surplus income and they do not have any impact on your standard of living, these will not be liable to Inheritance Tax.
No matter how you pay for a child’s education, you are likely to lower the overall value of your estate on your death which in turn will reduce the Inheritance Tax liability you leave behind.
If you have any questions about paying for a child’s education, our experts can help. Book an initial consultation online or call us on 020 7189 2400.
* Independent Schools Council Census and Annual Report, 2021
Nothing in this article is intended to constitute advice or a recommendation, and you should not take any financial decision based on its content.
The value of an investment may go down as well as up, and you may get back less than you originally invested.
Advice in relation to trusts is not regulated by the Financial Conduct Authority, however, the products used in relation to trusts may be regulated.
Issued by Tilney Financial Planning Limited.