James*, a long standing client, came to see me this year about his dream of funding university education for his grandchildren. He had read about high costs and was concerned that his daughter would struggle to cover putting her two children, Sophie and Harry, through university.
THE COST OF UNIVERSITY EDUCATION
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. James’s 10-year-old grandson, Harry, would be looking to commence his studies in 2022 and using the above figures, and assuming 2.5% per annum inflation, Harry would need in the region of £83,000 to fund going to university.
James was in the fortunate position of receiving a good guaranteed pension from an old employer, which was more than sufficient to support his retirement lifestyle. He was therefore able to notionally earmark a modestly valued personal pension plan to assist with funding Harry’s university costs.
I illustrated, with the aid of a cashflow analysis, just what his pension would need to grow by each year to attain his goal, and implemented a suitable investment strategy.
TAKING ADVANTAGE OF A TAX-FREE ALLOWANCE
The Budget 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 which is 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.
To take full advantage of this tax-free allowance, I recommended James puts in place an Offshore Investment Bond. Focusing on Sophie, an Offshore Bond (or parts of one) could be assigned to her to cash-in when she starts university, and any tax due would be based upon Sophie’s personal tax position. The amount received will be classified as part ‘return of capital’ (not taxable) and part ‘chargeable gain’ (taxable).
As chargeable gains are taxed as savings income, Sophie 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 James. As mentioned, the taxable gains are often only part of the withdrawn amount, meaning Sophie could receive enough to pay her way through university without suffering any tax.
With a little help from a financial planner, you too can attain some good results and see the dream of your grandchildren attending university (without a burden of debt) come true.
*James’s story is constructed from a number of actual client situations.
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The value of your investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.
This article does not constitute personal advice. If you are in any doubt as to the suitability of an investment, please contact one of our advisers. Please note we do not provide tax advice.