School of hard knocks: How to cut the soaring cost of private education
When it comes to our children, a good education is priceless. But if you’re talking about sending them to a private school, there is a hefty price tag, and it has been rising precipitously.
To send a child to a private day school from 2015 to 2028 will set you back an average of £286,000, says the Centre for Economic and Business Research. Since 2010, school fees in Britain have increased by an average of 20 per cent – four times the rate of growth in average earnings, according to Lloyds Banking Group. Pharmacists, opticians, vets and civil engineers on average earnings for their occupation would now have to sacrifice over a third of their income to pay fees for just one of their children.
London’s parents have things even worse, with the capital’s private schools charging more than the UK average. And boarding is vastly more expensive, costing £486,000, on average, for a child to be taught at day school until 13 and then to board until 18.
For many, the soaring fees are worth it. While 37 per cent of parents have considered taking their children out because of the financial pressures, the number of UK children in private education has remained relatively constant.
So how should you go about saving for private education and ensure you’re not paying through the nose?
If you can start saving as soon as your child is born, seriously consider it. “Children start school at the age of five, so you can grow a meaningful sum before they start,” says Sarah Lord, managing director of Killik Financial Planners. The later you leave it, the harder saving may become. “If both parents are going back to work, the costs of nursery bills, nannies and au pairs can quickly eat into those savings,” she says.
“Your saving strategy should depend on when the fees are due,” says Steve Caps, director and financial planner at Ramsay Brown Financial Services. “If you’re close to paying fees, you’re more limited in where you can invest, because you don’t want to risk losing money. Deposit accounts aren’t currently paying significant amounts of interest. Isas will, at least, reduce taxation.”
Junior Isas aren’t much use when it comes to school fees because they can’t be accessed until the child has reached 18, so parents will have to use their own Isa allowance or a different savings vehicle.
According to Maike Currie, investment director for personal investing at Fidelity International, it would take seven years of maximising your Isa allowance, assuming an annual growth rate of 5 per cent less platform charges, to amass just £131,957 – less than half of the total needed to send a single child to private day school. Your Isa portfolio should reflect your aims. Will you use your Isa to supplement your income as you pay the school fees, or use your savings to pay the fees? Either way, saving as early as you can will allow you to benefit from compounding over time.
Once you’ve run down your savings, older parents may consider drawing a tax-free lump sum worth 25 per cent of their pension to see their children through to 18. With interest rates so low, under-55s might look at increasing their mortgage to pay the school fees, and use their lump sum to pay off their mortgage debt once they can access their pension. But remember, your pension is designed to provide an income in retirement. Spending, rather than investing it, could seriously affect your quality of life in retirement, and you can’t reinvest that money at a later date.
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Many parents end up borrowing to afford the fees, often against the family home, and making payments every term. But tax breaks given to schools mean that, if you can afford it, there are advantages to paying several years’ fees as a lump sum in advance. Many schools will offer to put that money in low-risk investments, and because of their charitable status, they’ll avoid paying capital gains tax on any returns they make. In exchange, parents are offered a discount on their child’s fees, and the school pockets the remaining returns.
The bank of Gran and Grandad
It’s not only parents who can help. Everyone, even children, has an income tax personal allowance. And because non and basic rate taxpayers – children included – now receive the first £1,000 of interest on ordinary bank and building societies tax-free every year, a child is able to earn £11,800 in income tax-free every year. Parents are barred from taking advantage of their children’s tax status, but grandparents aren’t so restricted. Certain vehicles, like bear trusts and family partnerships, offer wealthy grandparents the ability to use their grandchildren’s tax-free allowance in ways that parents can’t.
Setting up a bear trust to pay for school fees would allow a couple’s grandchildren to receive up to £650,000 under the nil-rate band. Provided that they live for seven years afterwards, that money is excluded from the grandparents’ taxable estate.
As for family partnerships, grandparents set up a family business and name their grandchildren as shareholders. These partnerships pay special dividends which could cover their school fees, and different share classes could be established if one grandchild’s fees are higher than another’s.
Each scheme has its merits and drawbacks. “Family partnerships may offer more flexibility than trusts,” says Lord. “But accounting requirements and other costs associated with a corporate structure can make them more expensive to run.” Indeed, when the children turn 18, anything left will be legally theirs, so Toby Alcock, executive partner at Towry, suggests doing some cash-flow forecasting to estimate exactly what it will cost you to take a child through to 18. “Depending on an investment growth rate, there should be little left in it by the time they leave school.”
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There are some offshore options open to parents. They can invest a lump sum in an offshore bond and divide it into a number of policies assigned to their children, each covering a term’s fees. As the beneficiary, the child is liable to pay any tax on any gains and income. If a year’s fees exceed £11,800, there may be tax implications, but this is still an attractive option for parents who are higher or additional rate taxpayers.
It pays to be pushy
Elaborate tax schemes aside, there are simple things which parents should look into. “Paying by monthly direct debit can make things more palatable,” says Lord. And even though schools don’t advertise discounts, they are often willing to do a deal if you enrol more than one child. Enquiries cost nothing, so be sure to ask about any scholarships or bursaries your child might be eligible for.
Of course, all this begs an obvious question: how else could that money help my child? “Fourteen years of school fees from 2015 could be invested over this time to build a potential sum of around £800,000, which would help children later on in life, whether that be funding university, buying a house, or securing a comfortable retirement,” says Lord.
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If you decide that a private education is absolutely necessary, consider how much your child will benefit in their earliest years. According to the Killik Private Education Index, keeping your child in a state school until the age of 8 would shave £97,000 – more than a third – off the total cost of a private education.