Wills, estate planning and inheritance tax may inspire less enthusiasm than other aspects of wealth management, but their importance to your family’s long-term financial health means they cannot be neglected. Here are some key errors to avoid.
Recent news that private school fees have risen by 20% since 2010 may have panicked many parents, yet there are a whole range of strategies a wealth manager can deploy to make the costs more manageable. Here, advisers from a range of institutions represented by findaWEALTHMANAGER.com give their top tips for parents.
A new study has confirmed what many parents will already know from increasingly painful experience: private school fees are soaring. Fees have risen 20% since 2010* – over four times faster than earnings have grown – with average annual day school fees now hitting £13,194**. To put that into even starker terms, according to research carried out by wealth manager Killik & Co, sending two children to private day school will cost a staggering £553,000*** in total. University tuition fees of £9,000 a year and rising are then likely to be next.
The challenge of meeting such large costs year after year, perhaps for several children, is often one of the reasons that people seek professional wealth management advice for the first time. Yet parents shouldn’t be too daunted, as there are many strategies investment managers and financial planners can use to make the costs more manageable, according to advisers from four of the leading firms represented by findaWEALTHMANAGER.com.
Their first piece of advice, however, is to be completely realistic. Already eye-watering fees will doubtlessly continue to rise while at the same time parents are “always sailing into an uncertain fiscal environment that may undermine their ability to pay fees”, noted Charles Calkin, Director of James Hambro & Co. Naturally, parents will want to avoid at all costs having to remove their child from school and this has even led to some selling their houses to maintain continuity in their child’s education, he continued.
Parents must first accept that, in Calkin’s words, “choosing private education is a major financial decision that will shape your whole life” and that having a real understanding of the costs and issues is therefore essential. A big part of this is looking at total costs, and here uniform, sports kits, textbooks and other equipment are just the start. “You’ll also come under enormous pressure to pay out for school trips, and these won’t be cheap – year upon year of hockey tours to Amsterdam, ski holidays in Switzerland all add to the bills,” Calkin added.
The pressures are great, but there is a lot that proactive parents can do. “One thing is clear, meeting the costs of a private education needs careful planning as early as possible and families should investigate all the options,” said Sarah Lord, Managing Director of Killik Chartered Financial Planners. As she points out, asking grandparents for help is many parents’ first port of call and there certainly may be manifold benefits to be had here – particularly from an Inheritance Tax perspective, if strategies like trusts and intergenerational gifting are used. However, this has to be structured carefully to avoid unfairness to other family members in the final reckoning.
Another, popular strategy she highlighted is to use state schools at junior level, yet parents considering this should also be aware that their children then might face tough entrance exams at secondary level, which might make a preparatory school the better option.
Whether parents opt for “state until eight” or not, they should all be planning – and saving/investing – well ahead of time.
The first reason is one many parents may not know is a possibility. “Parents may look to spread the cost of private education over a longer period of time as many private schools will be open to bespoke payment schemes,” said Tim Healy, Executive Director at Quilter Cheviot. “Opening a dialogue with the chosen school early is essential to establish a favourable payment scheme. For example, parents can arrange to begin payments several years before a child attends the school and finish the payments after the child has left.”
The second reason, is clearly so that investors can harness the power of compound growth over as many years as possible, the experts said. Again, however, they must be must be realistic and recognise that it in the current investment environment it may take very much longer to achieve their goals.
It cannot be over emphasised that planning for school fees should begin as soon as possible in order to build up a suitable nest-egg and it is crucial from the outset that parents agree a reasonable set of expectations with their advisers, said Chris Catchpole, Investment Manager at Psigma Investment Management. In the current low interest rate and low inflation environment portfolio returns may be less than initially envisaged – the days of consistent annual double digit returns that sometimes still persist in the collective memory are unlikely for the foreseeable future. As he also pointed out, the period covering a child’s education will span several economic cycles, so it is vital to deploy an investment strategy that can smooth volatility and protect against the brutal market collapses that will inevitably occur occasionally over the years.
Achieving the returns (or capital preservation) you require calls for a careful calibration of the amount of risk you can sensibly take on, depending on your time horizon, tax position, personal circumstances and other investments. There are myriad complexities, but wealth managers are well-versed in helping families steer an optimised course through them. What’s more, they will know myriad strategies that the layperson may never have considered. A few of these brought to bear simultaneously could seriously lighten the burden of school fees, particularly if tax-efficiency is maximised as part of an intelligent overall wealth plan.
ISAs, Junior ISAs are all good starting points for a tax-efficient strategy, the experts agreed. The tax-free advantages of an ISA make it an ideal choice for parents planning and saving to pay for private schooling too. If both parents use their full yearly ISA allowance, in eight years a family could have a tax-free investment pot of approximately £300,000, said Tim Healy. “This can then be used as a tax-free supplement to an existing income when a parent starts paying school fees, or it can simply be drawn upon to pay the school fees.”
Yet those keen to really minimise their liabilities need to take a more holistic view.
Many people will be paying out of debt, leveraging the costs over a lifetime of earnings, so that takes careful planning, balancing budget choices between paying down the mortgage or the school fee loans and paying in to pensions, said Calkin. For some it may be worth using the tax breaks to pay into a pension and then paying off outstanding school fee debt with the tax free commutation.
This kind of long-term thinking also needs to encompass plans for if the worst – such as divorce or death – should happen, Calkin noted, and therefore many parents set up educational trusts or take out insurance to protect income, as well as of course keeping a detailed will up to date.
There may well be challenges around funding private education for one’s children, yet as Sarah Lord highlighted, parents still think it’s a worthwhile endeavour: Killik & Co’s study still found that a third of parents believed investment in education is one of the best investments they can make. You should not be put off of private schooling simply due to rising costs.
The important thing, the expert advise, is to implement an intelligent plan as soon as possible, rather than simply hope for the best. By using a combination of spreading the cost of school fees, savvy saving and various tax-efficiencies, parents can make the huge costs of private schooling far more manageable, concluded Tim Healy. Whichever methods are utilised, expert advice and planning at the earliest possible opportunity is absolutely essential to successfully manage the cost of private schooling.
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