By Lisa Lloyd, Wealth Planner.
It’s that time of year again – new uniform, new shoes, and a sigh of relief from parents around the country as the school gates open for another year. It’s also the time of year when education is front-of-mind, and parents consider the best route for their child, whatever age they happen to be. With private education on the increase, what are the financial implications of deciding to take the independent school route?
Private education on the increase
According to a census conducted by the Independent Schools Council (ISC), well over half a million pupils attend ISC member schools – more than ever before. This is despite private school fees rising by 3.4% last year – more than the rate of inflation.[1] With an average term of fees now costing £5,700, educating a child privately through senior school will cost around £85,500 (assuming five years at today’s average fees). Of course, those are just averages. In my experience working with clients in London and the South East, senior school fees can often exceed £10,000 per term, not including extras such as uniform and trips.
Planning ahead
If current education inflation of 3.4% persists, the average cost of private education will be nearly £26,500 per year, per child, by the time a new-born today reaches their 13th birthday. The total cost for five years of senior school will be over £141,000 per child. That means you need to start putting aside more than £11,000 per year from birth to cover these fees (albeit assuming no growth), and the later you leave it, the more you will have to save.
Without doubt, the best strategy for saving for school fees is to start early.
Savings for fees
If you can accept the extra risk it’s also advisable to invest your savings, rather than holding them in cash. A stocks and shares ISA is a great place to start as you can invest up to £20,000 per tax year (2018/19), and any returns you make are completely tax-free. If, for example, you start saving £7,500 per year from the day your child is born, and assuming you achieve an annual return of 5% on your investment, you will have saved nearly £140,000 by their 13th birthday. If you can save the maximum amount of £20,000 a year, you will have saved over £370,000 by the time they reach senior school.
For my clients in London and the South East, we assume they will need £500,000 to cover the cost of two children attending private school from age 4 to 18. A financial commitment that’s not for the faint hearted, especially since it is paid from net income.
(NB: It’s worth noting that a Junior ISA is a not a good investment vehicle for school fees, as you won’t be able to access these savings until the child is 18 years old. Junior ISAs are a good way of investing for further education, or for a deposit for a house.)
Depending on how old you are, another way of saving for fees is to consider using your pension savings. Not only is it the most tax-efficient way to save, you can access your money when you’re 55 years old, and you’re entitled to take the first 25% of those savings tax free.
Gifting from grandparents
You don’t necessarily need to find all the savings yourself. There are different ways that grandparents can help. They are entitled to gift up to £3,000 each year, inheritance tax (IHT) free, which could then be placed into your stocks and shares ISA. Grandparents can also use a trust to gift money, which gives them the control over how the money is spent and can also potentially lessen their IHT liability. This is a complex solution though, and professional advice is essential.
Taking advice
A financial planner can help you achieve your longer-term savings goals, and we’re finding that funding school fees for children and grandchildren is a key priority for many of our clients. The sooner you start putting plans in place to fund such expenses, the better, as these costs could escalate further over the next few years.
[1] Source: ISC Census and Annual Report, 2018 – www.isc.co.uk/media/4890/isc_census_2018_report.pdf