School Fee Funding
Posted: Monday 5 December 2011
School Fee Funding
There are many advantages in being able to provide your children with a private school education – but the financial implications are significant. Generally, for long-term funding of education to be feasible, parents need to have spare income to save for future fees, equity which can be released from property or another lump sum to immediately invest.
Many parents will have made provisional plans about how they would like their children to be educated from early on, and in such a competitive world the benefits of a good education are obvious, whether it is privately funded or not.
For those who wish to go down the fee-paying route, the ongoing costs can be a significant financial commitment, particularly if fees are paid out of “net” income. According to the Independent Schools’ Council, the average fee per term at an ISC school for 2010/11 was £3,655 (£8,384 for boarders) -- and fees are rising far faster than inflation.
With such a large call on the family’s finances, talking through the options with an Independent Financial Adviser can be a very important and valuable first step to ensure that you can meet the costs in the most tax-efficient and flexible way possible. At Morton Fraser, our advisers will discuss your plans for your children’s educations, and help you to arrange your finances so that you can meet the costs in the most tax-efficient way possible.
If you intend to educate your children privately, you need to plan for this. Even if you have some time before the fees are needed, we can help plan your savings so that the money is there when required. In general the earlier you start, the better.
Once the decision has been made, the question is how you will you fund it? If like many people you aren’t in a position to cover the fees from your own earnings, then there are generally a few options to consider:-
Spreading the cost
If you require the school fees immediately you may decide to spread the cost by making payments over future years using some form of borrowing. In the current climate this can be tricky depending on circumstances and, with interest rates at historically low levels, you should take into account the potential for future rises. Loans can either be secured or unsecured depending on your circumstances and requirements.
Once their child or children have started at a fee-paying school, parents often have trouble funding school fees wholly and continuously from taxed earned income. There are savings schemes available that are designed to help parents over the longer term by providing greater growth than a deposit account, thereby making the money last longer and reducing your costs over the duration.
To put it simply, this involves spreading an element of the school fees over a longer period. For example, a parent may be able to comfortably afford 70% of the school fees from income, but struggle with the full amount. In this instance, it may be possible to take out an equity draw-down plan to spread the school fees for the balance of 30% over a 10, 15 or 20 year period. If you are considering this, advice should be sought at the earliest opportunity.
Please note that if a mortgage is involved, your home may be re-possessed if you do not keep up repayments on your mortgage.
Gifts from family
You may be able to secure financial help through gifts from family: your parents or grandparents, for example. The “bank of mum and dad” phrase has been used a lot over the last few years.
Whilst gifts are welcome (particularly useful injections of cash!), there are a few things to consider. A gift is usually just that and the should not be expected back, but check whether it is intended as a loan -- the lender may expect it back at some point, with or without interest.
If it is a gift there could be potential inheritance tax implications for all parties involved, and advice should be sought on these particularly if the gift is from elderly relatives. At Morton Fraser we regularly advise clients on the use of Trusts, which can help mitigate these issues.
Using a lump sum
If you are fortunate enough not to require a gift or loan, and already have funds available, these can be invested to help meet the fees for the short, medium, and long-term. Again our advisers can help you to invest tax-efficiently to ensure that you get the most from your money.
There are a range of options available to you, including the possibility of paying the fees in advance either from year-to-year or for a longer term. The benefits of doing this will depend on any discounts offered by the school for paying in advance, but where the funds are currently invested should also be taken into account: for example money in the bank at the moment could be earning very little interest and so could possibly be put to better use.
However, if you prefer to pay the fees as they arrive, then investing a capital sum can help avoid the need to use future earned income to provide for school fees. With all investment options, the monies are only earmarked for school fees and it is at the investor’s discretion how funds are used, and when these are required. Investments can be structured to “mature” at different intervals to coincide with longer-term costs, perhaps including university fees.
Investing tax efficiently is key when tailoring individual arrangements. Managed portfolios and recommendations are constructed to take into account clients’ attitudes to investment risk, as well as their requirements.
Any plan should take into account the following key points:
- Ongoing management of your capital
- Diversified spread of assets to suit your risk attitude, and requirements for capital and income
- Minimise the burden of higher rate tax via tax efficient-investments
- Using Trusts where appropriate can also be a useful and effective solution.
As with all investments please bear in mind that the values can fall as well as rise, and regular ongoing reviews are extremely important.
Protecting your investment
Once your children have embarked on their education and you have gone to all the time and effort of paying and planning for the fees, you should consider what would happen if the main breadwinner became unable to earn due to injury, illness or death. Needless to say this can be a traumatic time for the family and changing school is the last thing your children need. It is therefore important to also take time to ensure your family is adequately protected, just in case.
For further details contact Sarah McKinlay by emiling sarah.mckinlay@morton-fraser.com or by caling 0131 247 3150
