The first step savers should make, according to Ben Smaje of Kennedy Black Wealth Management, “is to separate short-term needs from the long term, with a threshold of around five years.” Imminent fee payments should be made out of existing cash savings and future income, but beyond this horizon parents could think about other investment options.
Bare trusts, probably the simplest option, are opened in the name of the beneficiary, meaning that tax on income can be paid at the rate of the child – zero, assuming they earn below the personal allowance. A potential drawback is that income earned over £100 will be taxed at the rate of the trustees if they are the parents of the beneficiary. As a result, bare trusts may be better for channelling monetary gifts from friends and grandparents.
Jason Witcombe of Evolve Financial Planners says savers should see school fees as part of the broader financial planning picture. “Depending on income levels, parents could consider remortgaging to pay fees, putting any excess funds towards Isa and pension contributions”. This approach may suit parents with more than one child, who could be less likely to be able to afford monthly payments out of wages.
But even if paying out of income is not a problem, “depending on the appropriate degree of risk, investing in funds with stock market exposure can be a good way to make fees more affordable,” says Andrew Kemp of Radcliffe & Newlands. Smaje has crunched the numbers for a child born two days ago to attend a more expensive school. If you start investing £2,800 per month now, assume annual investment returns of 5 per cent and 6 per cent annual school fee inflation, by the time the child reaches the age of ten, your total monthly commitment would have declined to just £1,390. And assuming steady returns, for the last year you would be paying nothing at all (with your capital intact).