Most parents will have to cough up for their children’s years at university, and if you want to pay for private education at any time before that, the sums you’ll need escalate.
Here are the best ways to build up the cash you’ll need.
Junior school day fees are upwards of £9,000 a year and senior school £15,000 or more. How much you contribute towards university is partly up to you, since students can borrow using low-cost student loans, but budget for £1,000 per term.
Few parents can afford private education from income alone, so saving in advance is essential. Here are ways of reducing the fee pain.
Your mortgage
This is probably your biggest outgoing, so cut the best deal to save hundreds of pounds a year to add to the fee kitty. Go for an offset mortgage, because then you can save into your mortgage account and earn a higher net rate of interest.
If your mortgage interest rate is 6%, you’d need to earn 7.5% before tax at 20% to match the benefit of paying into your offset account; as a higher rate taxpayer, you’d need to earn 10% before tax.
Once you’re paying fees, the offset mortgage account can act as a buffer. If you agree a total maximum loan with the lender, you can pay fees by increasing your mortgage, knowing that extra monthly repayments will reduce it again.
Baseline savings
The first element of any regular savings plan intended for fee payment should be simple monthly plans earning the highest rate of interest you can get. All the big banks run monthly saver schemes with good rates fixed for one or two years - 8% currently at HSBC and Lloyds TSB. The maximum is usually £250 per month.
You can also sign up for monthly savings schemes with some other banks and building societies.
Remember that when the fixed term ends, the interest rate will probably drop, so look around for a good account for the lump sum you’ve accumulated, or pay it into your offset mortgage.
Tax-free savings with ISAs
If you can afford to make long-term savings of more than £600 per month, use a stocks and shares ISA rather than a cash ISA where your investment limit is £300 per month. For long-term savings (five or six years or more), at least some of your money should go into share-investing funds, which history suggests are likely to earn returns of up to two or three times what a deposit account will earn.
On a £500 per month saving over five years (10 years), earning an interest rate of 6% would accumulate £35,000 (£82,000) while with a 12% return you would get £41,000 (£115,000).
Because the ISA is tax-free for ever, it makes sense to try to defer drawing cash from it and to use up other savings first. Use a self-select ISA with a fund supermarket so that you can create your own bespoke savings plan - see below for two sample savings plans.
Start grandparents early
Many parents end up getting financial help from grandparents when a child starts school, but it’s better to enlist their help earlier. If you know you’re going to aim for private education, invite the grandparents to start contributing to a savings plan for this purpose as early as you can.
The plan can’t be an ISA (this can only be in the name of one person) but you can set up a savings plan with a fund supermarket in joint names of two or more people.
Avoid friendly society plans, whose charges are often high and where maximum monthly savings are limited.
Get covered
If your aim is for your child or children to be educated privately, make sure you have enough life assurance cover so that there’ll be enough to see them through. If you do this with term assurance, the cost of providing even a substantial lump sum will be quite modest.
Borrow against your home
Many parents who haven’t saved enough to pay the fees end up borrowing more against their home to pay the fees.
Using an offset mortgage is the best way to do this, but make every effort to pay off the extra borrowing as fast as you can.
Many school fee advisers will produce plans using ‘equity release’ in this way, showing how you can draw several thousand pounds a year for fees and pay off the extra borrowing from higher monthly repayments.
But it’s better to have saved in advance and not pay interest on the amount you’re paying in fees.
Fee saving plans
Your aim should be to generate high returns while limiting the risk by holding different types of investment. If you put too much in cautious investments, you won’t earn higher returns so there is little point; but if you put too much in higher-risk investments you could find values are low when you need to cash in.
So aim to encash investments that have done especially well before fees are due. And also look at the plan values every year and rebalance your savings portfolio – try to do the opposite of what most people do, and sell investments that have done well and buy more of ones that have done badly.
Over the longer term, regular savings works well with more volatile investments such as JPM Natural Resources and Rathbone Global Opportunities, because your fixed monthly contribution buys more units at lower prices and less at higher prices.
Short-term fee savings plan
£300 per month for 5 years . This plan assumes you already have a savings plan into a deposit account.
| Fund | Investment strategy | Monthly amount |
| BlackRock UK Absolute Alpha | Aims for positive return whether stock market is rising or falling; lower risk | £100 |
| Invesco Perpetual Income | High and rising dividend income, mainly investing in large companies | £100 |
| SLI Select Property | Invests internationally in commercial property | £50 |
| Rathbone Global Opportunities | Aims for growth from fast-growing small companies; higher risk | £50 |
| Total | | £300 |
Long-term fee savings plan
£600 per month/Ten years. This plan assumes you already have a savings plan into a deposit account.
| Fund | Investment strategy | Monthly amount |
| Gartmore Cautious Managed | Combination of fixed interest and shares; lower risk | £100 |
| Invesco Perpetual Income | High and rising dividend income, mainly investing in large companies | £100 |
| SVM Global | Wide spread of ‘alternative’ assets such as private equity, hedge funds | £100 |
| JPM Natural Resources | Wide global spread of mining and energy shares | £100 |
| SLI Select Property | Invests internationally in commercial property | £100 |
| Rathbone Global Opportunities | Aims for growth from fast-growing small companies; higher risk | £100 |
| Total | | £600 |
Important risk warning - please read
The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.
