October 2003

SAVING FOR A FUTURE

For parents planning to send their children to college or university, education, like any quality purchase does not come cheap. Tuition fees for the average degree course are about £1,000. Then there are living expenses, typically more than £6,000 a year. The result is that the average graduate now leaves university with debts of around £12,000 (according to recent statistics published by the National Union of Students).

In addition to this, a recent government white paper has proposed that from 2006, universities will be free to charge annual tuition fees of up to £3,000 - almost three times the current £1,100 maximum. The means-tested changes will hit some middle-income families hard, especially if their children opt for courses at top universities and colleges, which will be more likely to charge the maximum amount.

Due to these changes, graduates could leave university with average debts of £27,000. These debts could take decades to repay and have aroused widespread controversy.

As financial advisor Bob Thomas from Acumen Financial Planning, Aberdeen explains, the message is clear: the sooner parents can start saving, the better, and through planning well in advance it is possible to build up a substantial lump sum that can cover these fees and expenses. From bonds to trusts, savings and ISAs, there are many financial options for parents to consider that can ease the strain of education costs.

Premium bonds: A tax-free way to invest. Premium bonds are part of the government's national savings offering, and you can join in from as little as £100. They make a great present for your child from a relative, and you can opt for any winnings to be reinvested in more premium bonds. There are 500,000 payouts every month, starting from £50. Premium bonds could be considered as a lottery as the returns to the owner depend on how fortunate he or she is.

Friendly Society accounts: Save up to £25 a month tax-free for your child in a 'baby bond'. You could also take out an account in your name, and another in your partner's, to get the benefit of three tax-free savings accounts. Friendly Society accounts are quite attractive but restricted in the level that can be contributed to them. They could provide a suitable home for 'family allowance' payments. The accounts offered tend to be for a 10 year term that may or may not match the period over which savings are required. Early surrender may involve penalties.

ISAs: Individual Savings Accounts (ISAs) are tax-free, and most will allow you to save monthly. You and your partner can each put up to £7,000 a year into an ISA. These are stock market investments offered by banks, building societies, insurance companies, fund management firms and independent financial advisers, as well as non-financial firms like high street stores offering money services – all of whom charge varying amounts for you to join. Maxi ISAs may be better if you plan to lock-in the money for 10 years or so. Alternatively you could invest in up to three Mini Cash ISAs (up to a maximum of £3,000 in any one). You can invest in a Maxi ISA at age 18, or a Mini ISA at 16 – so you can't buy one in your child's name.

ISAs are very attractive and offer levels of 'tax free' savings (tax position is likely to be reviewed in the near future) that few individuals are able to maximise every year. If an individual is contributing to an ISA below the maximum of £7,000 per annum this may provide scope for adding children’s funds. The disadvantage being that the child’s funds are in the ISA owner’s name and impact on the ISA owner’s funding opportunities.

Bare Trusts: This is a unit trust set up in your child's name to invest in shares or building society accounts. However, if it earns more than £100 interest a year, this will be taxed as if it were your income, if you bought the account (though if a friend or other relative buys it is treated as the child's income). At age 18, your child is able to take control of the money. Bare Trusts are liable for income tax which compared with the above investments seems unattractive, but this can be offset against the child's single person allowance. Bare trusts are not limited to the amount that can be invested within them unlike the above investments.

Building Society accounts: If you open an account in your child's name, make sure to fill in form R85 so the interest earned is free of 20 percent savings tax. Keep checking the interest rate as it may dip considerably from when you set up the account. Building Society accounts can be considered as safe for deposits placed within them but returns tend to lag behind asset backed investments such as shares and Unit Trusts over the medium to longer term.

National Savings: These can be considered as safe and returns are pretty much guaranteed but once again tend to lag behind asset backed investments. Issues of National Savings certificates tend to be limited to subscription levels and interest rates payable over a set term. Many National Savings certificate holders are receiving considerably higher interest from issues in the past which cannot be matched by currently low interest rates.

Ethical investors: These are socially responsible investors who make a point of investing in environmentally-friendly companies, or which pass on part of their trading profits to charities. Ethical Investments can be accessed via a packaged product savings plan usually offered by Insurance Companies, Building Societies, Banks, and Unit /Investment Trust fund managers.

For more information contact Bob Thomas of Acumen Financial Planning Ltd on 01224 573904