A money makeover can help you plan ahead

By starting to save early, Elizabeth and Matt are taking measures to deal with future inflationJon Rolfe of Target Financial Management

"Right now my 18-month-old son James is happiest when he’s finding out what sand tastes like – but Matt and I are already thinking ahead to when education gets more serious," says Elizabeth Smith of Bristol.

“We want to know that when he’s old enough we could be in a position to educate him privately, so that he can go on to a good university if he wants. The nearest state school to our home, close to the centre of Bristol, is a very good one, but admission relies partly on church attendance – and we are not churchgoers. Both of us are freelance journalists – I work part-time and Matt full-time – and between us we take home between £60,000 and £70,000 a year.”

The Smiths' financial review

Jon Rolfe of Target Financial Management, which specialises in wealth management, advises the Smiths on how to save for school fees.

“Elizabeth and Matt want to find out whether they can afford to send James to private school,” says Matt. “As a guide to how much that is likely to cost they’re looking at Bristol Grammar School (BGS), where fees for the 2008-09 financial year are £9840. They’ve also asked me to calculate how much they’d need to save if they wanted to send James to BGS’s lower school at the age of seven, when admissions start. In the lower school, fees are currently £6519 a year.

Future costs

“Private school fees are rising fast, with the latest figures showing an increase of about six per cent in the last year – so Elizabeth and Matt need to bear in mind that costs may have risen substantially by the time James gets to school age, and will be still higher by the time he leaves. If the current rate of growth continues – and we’re going to assume it will – a school place that costs £9840 now could cost £16,624 by the time James starts school in 2018, and £24,997 by the time he goes into his final in 2025.

“That means Elizabeth and Matt need to plan to save for secondary school fees of £164,540 altogether. If James starts private school at age seven, then assuming fees go up again by six per cent a year between now and then, that would add another £38,164, making a total of £202,704.

Start saving early

“All of this may seem a long way off, but by starting to plan now, when James is still very young, Elizabeth and Matt are taking measures to deal with future inflation.

"If they don’t save at all and school fees rise to £16,624 a year by the time James goes to secondary school, it will cost them £1385 a month to pay those fees from income. But I’ve calculated that by starting early, they’re more than halving that figure and will need to save £597 a month. 

“My financial model assumes a seven per cent gross return on their investments – that’s a reasonably cautious approach but it’s important to remember that while the return could be more, it could also be less. The model also assumes school fees rise by six per cent a year.

“I showed Elizabeth and Matt a range of figures. If they start saving every month now until James is 18, they will need to save £597 a month to pay for secondary education only. If they want to fund both primary and secondary education that figure rises to £806 a month.

 “Another alternative is that they start saving now and stop saving when James starts education. In that case, they’d need to save £759 a month for secondary education only and £1690 a month for both primary and secondary education. Many parents will want to spread their payments until their child finishes education, but if they are getting help from a grandparent it might be more appropriate only to save until their child starts school.

“Of these options, Elizabeth and Matt said saving £597 a month was the most likely," Jon concluded.

Tax-efficient savings

“If they are to reach their long-term target, Elizabeth and Matt should start saving that £597 every month – starting straightaway. Elizabeth is a basic rate tax payer, while Matt is borderline between the basic rate and higher rate, so I’d recommend the investments be held in Elizabeth’s name, with James as an account designate. This reduces the potential tax payable.

“The first thing to consider is if Elizabeth and Matt have used their ISA allowance, which allows each of them to save £7200 a year tax free. I’d recommend they put all they can into this form of saving because of the amount of tax they will save in the long-term as the total saved builds up.

“I’d also recommend they saved through a ‘fund supermarket’. This is a simple administrative platform that means you only have to make one payment in, but once that payment has been made you can spread it between lots of different investments. You get convenience and diversification. If you move into different investments at different stages it costs next to nothing to do that and there is a lot of choice. 

“I wouldn’t recommend the use of trusts as inheritance tax is not an issue at the moment and the sums involved would not warrant the initial costs. I would recommend that an investment such as a unit trust or an OEIC (open-ended investment company) was held in Elizabeth’s name with James as account designee. Any capital gains can then be offset against James’s capital gains tax allowance. At £9600 for the 2008/09 year – the same as the adult allowance – he’d be unlikely to use that up unless he had growth of 30 per cent a year, so this should mean that the returns are virtually tax free.

“Some investments produce a small amount of income such as dividends. In this instance, the first £100 a year of income would be taxable on James (hence, tax free) and the remainder on Elizabeth. In terms of which products Elizabeth and Matt save into, I’d recommend a spread of funds with a range of different investment managers, gaining exposure to a blend of fixed interest securities, such as corporate gilts, as well as property funds, UK equities and international equities.

Keeping track of investments

“It is one thing to get the investments set up correctly, however it is equally important that Matt and Elizabeth revisit their investments on a regular basis to make sure they are still on track to reach their target.

"It’s important they don’t bury their heads in the sand for 10 years and then find school fees have risen by 10 per cent a year as opposed to the assumed six per cent.

“Ongoing reviews mean that they can check their savings are growing in line with the assumptions that we have made in the model – and that school fees are also continuing to grow at the rate we’ve assumed for them. It’s also important to remember that every individual or family will need different advice, depending on their exact circumstances.”  

It’s important to get impartial advice from an independent financial adviser who can search the market for the financial products that are most likely to benefit you. For a list of independent advisers in your area, go to www.unbiased.co.uk

For more advice, contact Target Financial Management

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