School Fees Planning
What is School Fees Planning?
All parents want to give their children the best start in life. The best education that money can buy will undoubtedly help a child achieve success academically, and will provide a non-academic experience that may serve them well as an adult. For many the cost of private schooling may seem prohibitive, however with a little planning it may not be as unachievable as first thought.
Income v. Capital
In broad terms planning for private schooling is really quite simple. School fees and associated costs will have to come from income (earned or investment), capital or a combination of the two. Let’s look at these options in a bit more detail.
Option 1: Earned Income
A parent or parents will need to have enough net income after income tax and national insurance to pay the ongoing fees and associated costs of the chosen school. This is a very simple method and is reliable whilst parent or parents can sustain an income to pay for the fees and associated costs. However, instances of redundancy or meagre pay increases may put an end to private schooling swiftly.
Option 2: Build up Capital
This approach assumes that currently there is no lump sum available that could produce the required income or capital drawings required to pay the fees. In this case parents will invest a monthly amount into a suitable investment contract to build up a capital lump sum for when a child or children start school. There are a number of assumptions that need to be considered:
- School fees today and what they might be when the child starts school.
- The inflated cost of associated expenses e.g. uniform, study material etc.
- The amount of risk parents are prepared to take now and how that changes as the start date draws closer.
- The impact of charges on the invested capital.
- Unforeseen financial stress that might mean the capital is diverted elsewhere.
This is one of the most common methods of school fees planning. It is prudent to start with the school fees and work back to what monthly amount or lump sum is required to reach the target capital in the future. It is essential that such an approach is reviewed regularly to make sure that the plan remains on track.
Option 3: Investment Income
In this case parents may have an existing investment vehicle with enough invested capital that will produce enough income to pay the ongoing fees and associated costs of the chosen school. The income produced must be net of all fees, charges and taxes. Due consideration must be given to the underlying assets that are producing this income to ensure that the income produced remains constant and keeps pace with inflation. A sustained period of falling capital values or poor yields will quickly devalue this strategy.
Option 4: Income and Capital
An approach that uses income and capital simply blends all possible strategies. This approach might be used because parents cannot fund the fees through one route alone. A parent may receive an unexpectedly high or low bonus at work; an investment portfolio might enjoy more capital growth and less income; or a mixed strategy might prove more tax efficient.
Whichever route taken to tackling school fees, there is a real need to plan well in advance of the proposed start date of your first lucky child. Many parents focus primarily on the fees and miss the fact that the ancillary costs of private schooling must also be factored in to the total cost.
Careful financial planning to ensure enough money will be available to meet the fees is critical. We can run calculations to establish how much is required and by when, and the advise on suitable structures and investments where required.