How to create an education fund for your child or grandchild
Chris Broome – Chartered Financial Planner
The cost of education can be expensive and if you have a child, it’s natural to want to give them opportunities to thrive, whether that’s attending a private school, having support from a tutor, or providing a helping hand when they go to university.
As costs rise, creating an education fund can provide peace of mind and help children take advantage of opportunities.
The cost of raising a child is over £75,000
According to research, the cost of raising a child from birth to 18 is £75,436. That’s a significant sum and doesn’t include some of the largest expenses that families face, such as housing and childcare. The costs add up and that’s before you consider paying for additional educational costs. If it’s a priority, taking steps to build a separate education fund can provide some security even if something unexpected happens.
Education costs can run into tens of thousands of pounds a year, so it’s important to plan.
Private school fees vary hugely depending on location, whether they’ll be a day pupil or boarding, the age of the child, and, of course, the school you choose. Parents can expect to pay between £15,000 and £30,000 a year for private school. If you’re thinking about private school, it’s worth reviewing your local options and comparing fees. Remember, private school fees will typically increase as the child gets older and you may want to factor in additional costs, such as music lessons.
It’s not just compulsory education up to the age of 18 you need to consider either. In the last 20 years, the number of teenagers going to university has increased. Around a quarter of all children will secure a place at university with the hopes that it furthers their career prospects. While student loans are an option, you may want to help financially too. University now costs up to £9,250 per year, with the majority of courses lasting three years. On top of this, there may also be housing costs, day-to-day expenses and study equipment to consider.
While you don’t need to create an education fund for a child, it can help them reach their full potential and aspirations. If paying for education is something you’re considering, creating a ringfenced fund can help ensure the finances are available when they’re needed.
Setting out your goals
The first step to creating an education fund is to think about what you want to achieve. For example, will it be used to support your child through university? Or do you want it to pay for school fees from the age of five until they’re 18? Or you may want to have the fund to pay for a private tutor to supplement learning at a state school.
Understanding what you want to get out of the fund can help you stay on track. Education can be expensive, and it may be one of your largest outgoings for an extended period, so it’s important to set out your aims from the beginning.
Making it part of your financial plan
As mentioned, paying for education can be a significant cost that can last for many years. Making it part of your wider financial plan makes sense. By putting it in your plan, setting up an education fund isn’t an afterthought, instead, it’s a priority. It can help keep your plans on track and give you confidence.
It can also help you to think about how to get the most out of your money and take advantage of tax-efficient solutions. If you’d like to discuss how an education fund can fit alongside day-to-day expenses, planning for retirement and other goals you may have, please get in touch.
Choosing the right place to save or invest
Finally, you’ll need to decide how to save or invest for your child’s education. There are plenty of options, allowing you to find one that suits you.
The first question to answer is whether you want to save in cash or invest the money. Both have pros and cons, what’s right for you will depend on the goals you’ve set out. Choosing a cash account means the money is secure and will receive interest, however, inflation can reduce the value of savings in real terms over time. In contrast, investing can help your money grow but it’s exposed to investment risk. Your timeframe, along with other factors, will play a role in which option is right for you. As a general rule, investing should be only considered if you have a minimum timeframe of five years.
In some cases, a combination of saving and investing can make sense. For example, you may use a cash account to save for private school fees but invest for university costs.
You also need to think about where you’ll save or invest. Two options to consider are:
- Junior ISA (JISA): A JISA is often used to save on a child’s behalf. The money can be saved or invested and is tax-efficient. The 2020/21 JISA allowance of £9,000 means you can build up a sizeable sum. However, the money won’t be accessible until the child is 18. This can mean it’s a good option for saving for university, but it can’t be used while they’re at school and college. It’s also worth noting that your child would have control of the money when they’re 18 and can spend it how they wish.
- Trust: Setting up a trust to use as an education fund allows you to ringfence the money and save or invest. Depending on how the trust is set up, you can manage the assets held within it and access it while they’re still a child, for example, to pay for school each term, trips or extracurricular activities. It’s an option that can provide flexibility but does need careful thought. There are several different types of trust and it can be difficult, or impossible, to reverse decisions you make, so advice should be sought first.
These aren’t the only option. You could use an ISA in your name, for instance, to save or invest while still retaining control over how and when the money will be used. Please contact us if you have a promising child and want to save to provide them with additional educational opportunities. We’ll help you create an education fund that suits your goals and provides security throughout your child’s schooling.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.