Wealth planning issues of various kinds have been a real feature of our conversations with High Net Worth Individuals in recent weeks.
A new generation of undergraduates will soon get their first taste of freedom at university. But as invaluable this experience is, it is now an alarmingly expensive one too. Here, we offer saving and investment ideas for parents and grandparents keen to prepare.
Maximum annual university tuition fees now stand at £9,250, while living costs, accommodation and food can be as much as £12,160 a year, according to The National Union of Students. The average cost of a three-year degree is often quoted as £64,000, and the average graduate emerges some £50,000 in debt, according to The Institute for Fiscal Studies.
The total costs of a degree are likely to be over £100,000 by the time a child born today goes to university 18 years into the future
Inflation means the numbers are getting even more frightening. The total costs of a degree are likely to be over £100,000 by the time a child born today goes to university 18 years into the future.
It goes without saying that education is almost always an excellent investment. It should also be said that currently graduates only have to start repaying their student loans when they earn over £25,000, and that loans are written off where they have not been paid off in full after 30 years.
However, all parents and grandparents will be concerned that those kinds of figures represent very large debt burdens to be starting life with – and that student loan repayments can represent a significant chunk of income at a time when many will be trying to get onto the property ladder or start families.
All parents and grandparents will be concerned that those kinds of figures represent very large debt burdens to be starting life with – and that student loan repayments can represent a significant chunk of income at a time when many will be trying to get onto the property ladder or start families
The good news is that there are many ways you can invest and hold assets efficiently for the education of children and grandchildren. Here are four ways to give the younger generations a real head-start in life, and minimise the risk of education debt.
Even if you only have a baby at present, the perfect time to start investing is now. Investing a relatively modest £350 a month into a stocks and shares Junior ISA (JISA) in your child’s name should result in a pot large enough to wipe out their university debt after graduation, assuming growth of 5% per year.
Remember, however, that you can only invest £4,368 (2019/20) into a JISA each year and the money is locked in until the child reaches 18 and it legally becomes theirs.
If your child is already hitting their teens and you are only starting to look at university costs now, you will have to take decisive action without delay. You will have to set aside and invest to good effect around £950 a month – almost treble the amount in the JISA example above – to meet the projected costs.
If your child is already hitting their teens and you are only starting to look at university costs now, you will have to take decisive action without delay
Bear in mind, however, that this again assumes 5% annual growth. Wealth managers often manage different pots of money along slightly different lines, and, while you should only take a reasonable level of risk for your profile, it could be that one portfolio is slightly more aggressively oriented to achieve a certain objective in shorter order.
The portfolio growth levels we assume are in line with what any professional investment manager will be able to deliver (risk-profiling allowing). They will also leave more of your returns intact by only extracting a reasonable fee. Always consider what a better performing or better priced manager could achieve for your child or grandchild’s funds. Our 3-minute online search tool can help.
Grandparents might look to make gifts of up to £3,000 each tax year, as well as other gifts (as long as they come out of normal income and don’t affect the donor’s living standards) as a way to reduce the eventual Inheritance Tax (IHT) bill due on their estate while helping out with university costs.
Christmas, birthday and wedding presents can be substantial (you can give up to £2,500 to each grandchild and £5,000 to each child as a wedding present, for instance).
Note that the donor must survive seven years after the gift in the case of “potentially exempt transfers” and that the tapered relief currently available for deaths within this timeframe is now under review.
Bare trusts can be a great option for grandparents who want to make significant gifts to help with educational costs, but who are also concerned about minimising tax and protecting family wealth from divorce.
A bare trust is a legal arrangement that allows you to transfer assets to your grandchild’s parents (the trustees) to hold for his or her (the beneficiary’s) benefit until he or she reaches 18. Assets held in a bare trust are counted against the child’s own income tax and capital gains tax allowances (not yours or their parents’), meaning a gift of as much as £200,000 could enjoy tax-free growth.
Assets held in a bare trust are counted against the child’s own income tax and capital gains tax allowances (not yours or their parents’), meaning a gift of as much as £200,000 could enjoy tax-free growth
Bare trusts are relatively straightforward to establish, but taking professional advice is vital, however, to ensure that assets are put out of reach of a parent on divorce, creditors on bankruptcy or other family members on death.
Private school fees are also an ever-heavier burden as well as university fees. Therefore, it is unsurprising that the start of new school and university terms always prompts a real spike in enquiries from parents and grandparents keen to know how family wealth can be made to work harder to fund education costs.
These ideas for investing for university fees illustrate how important it is to see family wealth in the round and to approach tax efficiency with just as much seriousness as investment returns.
In all scenarios, it is always better to start as early as possible so that you can maximise the benefits of compound returns over as long as possible and allow tax planning strategies time to work. That said, it is never too late to make proactive moves to maximise your wealth.
Our Knowledge Centre features many more expert pieces on how to save and invest intelligently for the younger generations, as well as the full spectrum of other wealth management ambitions.