Attending private school is a privilege that comes at a high financial cost, but with the right planning in place, it could be an achievable investment.
With school fees on average £5,132 per term, and due to rise by 3% over the coming year, it is important to plan ahead and establish a sizable savings pot to help pay fees when they become due.
How much do I need to save and when should I start? Cash flow modelling can help answer these questions by projecting the future cost of the education, modelled against savings accumulated to date.
Take an example of a couple who wish to send their five-year-old child to a private secondary school in Southwest England. Assuming fees rise at an annual average of 4% per annum, when the child starts secondary school, the fees would be £17,465 pa. Cash flow modelling projects that a sum of £79,297 today would be sufficient to cover the school fees, assuming average net investment returns of 5% per annum.
Are there tax-efficient ways of saving towards school fees? A simple way to save for school fees is within a Stocks and Shares Individual Savings Account (ISA), within which an adult can save up to £20,000 each tax year. By using ISAs, a couple can save up to £40,000 pa completely tax-free.
Are grandparents able to contribute? Each grandparent can make annual gifts of up to £3,000, being immediately exempt from Inheritance Tax (IHT). Larger sums can be gifted free from IHT provided the grandparent survives the gift by seven years.
Grandparents could also benefit from ‘normal expenditure out of income’ rules. Essentially, any income surplus to their needs can be gifted away. However, the rules are strict and it is essential that specialist advice is taken.
Grandparents can also set up a ‘bare trust’ to hold assets gifted for the payment of school fees. This has the benefit of the income or gains being taxed in the grandchild’s hands rather than the grandparents.
What else should be considered? It would be worthwhile looking into establishing suitable protection cover to ensure that school fees can continue to be paid in the event of death or inability to work.