Back to School/ University....it's just around the corner!

Summer is a great time to spend with the family during the holiday period. There has been much going on with events and social outings, along with holidays, being enjoyed by many. A great distraction from the autumn months when new school terms start and the reality of funding this education need, from uniform costs to school/ university fees as examples, to be considered and planned for. All very topical subjects this month with exam results being released and the Government making its announcements on a new Child Care cost system (August 2013) from 2015.

These education issues are a concern to many parents and grandparents alike and, like pension planning, planning early and funding correctly can be used to meet future requirements. I have detailed some thoughts on this financial planning topic below. As I am sure you would expect, the team at Chapters Financial Limited can help you with meeting your financial planning strategy for this need.

University – Tuition Fees and Costs

Recently, the Government introduced legislation which allowed Universities in England to charge tuition fees for attending their courses. The current permitted maximum tuition fees within English universities is £9,000 pa (2013) for UK/EU based student nationals. Almost three quarters of universities in England are planning to charge the maximum £9,000 pa tuition fee for some or all of their courses, according to Office for Fair Access (Offa - their website can be accessed using the following link http://www.offa.org.uk/ ).

With estimated living costs, of approximately £10,000 pa, and upwards, on top of the tuition fee then a standard 3 year honours degree could cost anything in the region of £57,000. Considerably more if postgraduate study is undertaken. This would be a tremendous burden of debt for any graduate to start off their future career.

Currently, there exists the option of a Tuition Fee Loan which is paid directly to the university or college. Currently the maximum loan available is £9,000 for a full-time English / EU student. The loan would start to be repaid when the income of the student / graduate is greater than £21,000 gross pa. The interest rate charged on the loan is rate of inflation, Retail Prices Index (RPI), plus up to 3% pa (depending upon study period and income) and applies until the loan is paid back in full. More details on student finance can be found at the Government Student Finance website (https://www.gov.uk/student-finance).

Private School Fees

According to the latest census by the Independent Schools Council, average fees have risen by 3.9% to £4,765 a term (or £14,295 pa in 2012/2013). Further information can be found on the Independent Schools Council website at (http://www.isc.co.uk/ ). If you want your child to board then this could increase to an average of £10,054 a term (£30,162 pa) in Greater London, for example.

As you can imagine, if the choice / option to send your children to an independent school, rather than rely on the state education system, has been made / is being considered then the total costs can be significant and could far outweigh the costs of attending university noted above.

Possible Solutions?

There are many different solutions to help plan for these future costs. One key area which should be taken into account is the effect of inflation, which could erode the real rate of return. Also, the time horizon available before the money will be required.

For example, we have commented in previous blogs on the use of Junior ISAs (JISAs) or Child Trust Funds (CTFs), however, these would not allow access to any capital until the child reaches the age of 18 and at that point it is the child/young person’s money, not the parent’s / guardian’s money, to do with how they wish. This raises the concern that they may not choose to spend it on education.

Another example, which may appeal to Grandparents, might be the use of the Annual Gift Allowance, which allows each individual to gift £3,000 pa and this money will be outside of their estate, for Inheritance Tax purposes, with immediate effect.

As an example, if this £3,000 pa was gifted to the child’s parent to save in an ISA arrangement for 15 years at £250 per month, to provide for university costs at a child’s 18th birthday, this might provide capital of £68,100 at that time.

Source: FundsNetwork illustration, with an Assumed Return after charges of 5.3% - not guaranteed, Past Performance is not a guarantee of future performance.) 

Summary

Is there an answer to the rising costs of education and the way it should be funded? Invariably, a combination of planning solutions are used and there is no simple answer apart from to start planning for the potential cost as early as possible and seeking financial advice from a professional Financial Planner.

No individual advice has been provided in the content of this blog. For individual advice on your education cost provisions and needs, please contact the team at Chapters Financial on 01483 578800

Simon Hewitt BSc (Hons) DipPFS
Financial Planner
Chapters Financial Limited

Chapters Financial Limited is Authorised and regulated by the Financial Conduct Authority.

Chapters Financial Limited is not responsible for the content of external websites.

How to save for your Children’s future

We are often asked by our clients what is available for them to start saving for their children’s futures? The question is a valid one as they want to ensure their children have as good a start as possible. However, what many people don’t realise is that if a parent gives money to a child, and that money generates more than £100 per year in income, then the income is taxed on the parent’s marginal tax rate and not the child’s.

 

Children, the same as adults, have a personal income tax allowance of £9,440 in the current tax year (2013/2014) which is the amount they can receive as income before income tax is liable. So what are the options available to parents? I have given brief descriptions below of some of the options which could be utilised. This is not an exhaustive list, but provides some ideas for your consideration.  

 

Child Trust Funds

 

These were available to children who were born between 01 September 2002 and 2 January 2011 and who lived in the UK. The Child Trust Fund (CTF) is a long-term tax free account which allows £3,720 a year to be added into the account. The money belongs to the child, however the fund cannot be accessed until the child reaches 18 years old.

 

There are 3 types of Child Trust Fund accounts: 

• Stakeholder (certain rules apply, such as you must invest in more than one company and move to lower risk investments when the child is 13)
• Share Account (Equity based fund)
• Savings (Deposit based fund)

The Government is currently considering whether to allow Child Trust Funds to be converted into Junior ISAs (described below) but this is purely at the consultation phase and has not been passed into legislation. There is no guarantee that any changes will be made.

 

Junior Individual Savings Accounts (JISAs)

 

The Junior ISA effectively replaced the Child Trust Fund and was initially made available from 01 November 2011. The child is able to own a Junior ISA if they are under the age of 18, live in the UK and were not entitled to a Child Trust Fund (CTF). Any income or gain is free from tax other than the 10% dividend tax credit produced by equity holdings which cannot be reclaimed.

 

The account can be opened by the child if they are at least 16 years old or by the person with parental responsibility. The account is owned by the child but operated by the parent / guardian until the child reaches the age of 16. The money cannot be accessed until the child reaches 18. When the child reaches the age of 18 the Junior ISA is automatically converted into a full adult ISA.

 

Similar to adult ISAs, there are two types of Junior ISA – a Cash Junior ISA and a Stocks & Shares Junior ISA. You can choose either type, or both, but the combined maximum annual contribution is limited to £3,720 (2013/2014).

 

Pensions

 

Any UK resident is allowed to contribute 100% of their earnings or up to £3,600 (gross), whichever is greater, in each tax year and receive tax relief at their marginal rate up to a maximum of £50,000 (2013/2014).

 

Therefore, the majority of children could, as an example, have contributions of up to £3,600 gross per year into a pension fund which grows tax efficiently. This means that to receive the total maximum gross contribution of £3,600 the money invested on behalf of the child would only have to be £2,880, with the remainder (£720) being paid by the government in the form of tax relief at 20%.

 

It should be noted that the fund which is accumulated within a pension cannot be accessed until the age of 55 (under current legislation). From the age of 55, the fund can provide a tax-free lump sum of up to 25% and the balance providing a taxable income.

 

Summary

 

These options could be very useful in the early financial planning of any child’s future, however professional financial advice should be received before implementing any savings for children. There are other tax efficient savings options available, such as Premium Bonds, and it is sensible to consider these before finalising any savings plans you have for the future.

 

If you would like to know more about this area of financial planning, your children’s tax allowances, and the different types of accounts available to children then please contact the team at Chapters Financial Limited on 01483 578800.

 

No individual advice has been provided in the text of this blog. We would urge you to seek independent financial advice (IFA) on your own individual circumstances and needs.

 

Simon Hewitt BSc (Hons) DipPFS

Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.