September 2003

Q & A: SCHOOL FEES

I want to send my children to an independent school next year but know it can be very expensive, what is the best way to manage these costs?

The aim in this instance is to improve cash flow and make the fees more affordable. The way that these plans work is to spread the cost of the fees over a longer period to make them manageable. This is best explained by an example.

Child aged 15 with nine more terms remaining before finishing school. The termly fee is £2,500, but the parents can only reasonably afford £1,500 from income. Hence over the next three years they will need an extra £9,000 (9 terms x £1,000). Say £10,000 allowing for increases in fees. The parents own a house worth £150,000, with a current mortgage of £80,000. They can set up a "drawdown" facility, secured on their property, for the £10,000. As and when they need extra funds they effectively write themselves a cheque from the drawdown facility, and the amount is added to the mortgage.

Crucially, they only pay interest on the amount they actually drawdown, not the full £10,000. The repayment period of the drawdown facility can be set to fit in with the parents' disposable income. I have a lump sum available now which I wish to invest for my child’s education. What is the most efficient way to do this?

Whatever type of investment is chosen, it is essential that they should be as tax efficient and flexible as possible. In many cases it makes sense to take advantage of both parents' ISA allowances, and whatever vehicle is used, it must be flexible enough to be able to cope with changes.

Underpinning any planning is the need to assess parents' attitude to risk. Whilst low risk assets such as building society deposits will not fall in value, they are unlikely to produce returns that will keep up with inflation. At the other end of the spectrum, many investors are uncomfortable with the volatility of equities, even though in the long term they often produce the best returns. What is needed is to arrive at a portfolio that the parents are comfortable with and that stands a good chance of achieving its objectives.

I want to send my children to an independent school – how can I best fund the cost of future fees through regular savings?

The key is – start as early as possible, preferably before the child is born. In this way the impact on take home pay will be minimised when the fees actually start. Just like the lump sum route described above, any plans should take advantage of available tax breaks, be flexible and fit in with the parents' attitude to risk.

Protection:
Even the best-laid plans can go wrong if unforeseen events happen along the way. It is therefore highly recommended that parents insure against death, loss of income and/or critical illness. For a very small additional outlay, this ensures that whatever happens, the children’s educational plans can continue as intended.