My children are emerging from their school days – but the expense is not over yet. There’s still a conversation to be had about what money they might need for university tuition fees and living expenses, given the punishing terms being foisted on graduates.
All of this means the decision to privately educate a child is one of the biggest financial commitments we will ever make – and, therefore, it needs a plan.
Here’s my nine-step approach:
1. Put tax-free investing first
Every year you can invest up to £20,000 into a stocks and shares Isa which shields any returns from tax. This is often the no-brainer starting place for long-term savings.
2. Start as early as is practical
The average managed stocks and shares Isa returns 5-7pc a year. So, if you put in £20,000 a year for three years and made 6pc annually on it, you’d end up with roughly £7,500 in tax-free returns by the time your child starts reception. Not bad, but you’d probably need to dip into the capital to cover their first year of school fees.
Invest like this for 10 years – starting before you have children – and the return could be almost £80,000, the equivalent of four “free” years of school fees.
3. Understand timeframes
Education fees are not a one-off cost – they are an annual pain point for some years!
To account for this, consider splitting the savings into a few different pots for short, medium and long-term timeframes. This could cover a child’s whole education, with short-term savings covering early years of education, medium-term for the first years of secondary school, while longer-term cash can have time to grow to cover A-level years and perhaps even university.
Of course, you might not plan to send your child to private school for their whole education. That should be reflected in your investment choices too. For example, if your child is a baby and you’re considering private school once they get to secondary school age, consider a higher-risk profile investment approach with a 10-year-plus timeframe. This gives you the best chance of maximising returns.
But if you have a shorter timeframe, such as planning to send an 11-year-old to private school for their GCSE years, then a cash Isa could make more sense. Investing is not recommended for shorter terms, as your money has less opportunity to ride out periods of volatility.
4. Consider a ready-made Isa
If you’re not confident picking investments yourself, you can choose a ready-made collection that fits your timeframes and risk appetite. For example, a medium-risk portfolio is usually suitable for timeframes of around five to seven years. Boring Money’s comparison content series shows that the average medium-risk ready-made portfolio has returned around 35pc after fees in the last five years.
If you have longer timeframes for at least some of your savings, consider a low-cost global tracker exchange traded fund (ETF). Sounds complicated, but it’s just a collection of the world’s leading shares in one simple product. Vanguard or iShares are good starting points.
So, using the example of an 11-year-old, you might split your money into three pots. One (cash) for the next two to three years. One in a medium risk pot for the GCSE years. And a higher risk pot for A-levels and university.
If you want a ready-made portfolio, Boring Money’s comparison tables can show you which provider has a combination of decent returns and good service across all three risk profiles.
If you just want an ETF, low-cost options to buy and hold these inside an Isa include Trading 212 and Freetrade.
6. Junior Isas
Do you have parents who can help with costs? If so, setting up a junior Isa is one way to get ahead.
You can shield up to £9,000 a year here from the taxman, and family and friends can pay in – though you’ll usually have to set up the account.
In 10 years, in a high-risk portfolio, £9,000 a year could become £140,800, assuming a high-risk return (8pc). Even if your parents could only afford £100 a month, the compounding helps.
7. Invest regularly (not in lump sums)
If it’s feasible, invest monthly rather than annually for the best chance to mitigate market volatility. Spreading your contributions out means you buy at a range of different prices over the year, rather than risking putting a lump sum in right before a dip.
This approach, often called “pound-cost averaging”, won’t guarantee better returns, but it can smooth out some of the market ups and downs along the way.
From an administration point of view, setting up a direct debit makes this a simple habit and can also minimise or entirely cancel out any transaction fees, which is a bonus.
8. Ask grandparents as part of their inheritance tax planning
If circumstances allow, it’s worth having a conversation with parents or other older relatives about contributing toward school fees as a form of early inheritance. Not only will this help out you and your children, but it can also reduce a potential inheritance tax bill.
The most straightforward option is the annual gift exemption. Each person can give up to £3,000 per tax year free of inheritance tax, with no minimum survival period required. Couples can therefore give up to £6,000 a year between them, and if last year’s allowance wasn’t used, it can usually be carried forward.
For those able to give more, it’s possible to protect larger gifts. One way is simply by surviving the gift by seven years, after which time it falls outside inheritance tax. There’s also a lesser-known exemption for regular gifts made from surplus income, which can be unlimited in value provided they’re consistent, come from income rather than savings, and don’t affect the giver’s own standard of living. Grandparents’ investment income could be an eligible option.
9. Other choices
Protecting what we have is also a factor. Critical illness cover and income protection insurance are worth considering, so you don’t forfeit all income if you have to stop working.
If you have paid off a larger part of the mortgage, some people also consider their options around remortgaging to free up some cash.
And finally, make sure the sums add up!
For many people, sending their children to a fee-paying school is a life goal. But it mustn’t come at the expense of good financial housekeeping for your own future. Neglecting your pension and all the tax relief available can hurt in later life, so prioritise, have a plan and do the maths to make sure this is a realistic route for you and your family.
