How can we be smarter about school fees?

Investing in your children’s future is one of the most important financial decisions you can make as a parent.

However, providing them with the best opportunities can carry a hefty price tag as is the case with their education. While the rewards of a private education are substantial, careful financial planning is required to ensure that the financial burden doesn’t become overwhelming.

These days, even households which rank among the top one per cent of earners in the country, those with an annual income of £180,000 or more, and two children, can struggle to afford the fees for a good private school after paying their taxes and servicing a typical mortgage.

The cost of sending your children to an independent school is rising at a rate above inflation with private education now nearly 50% more expensive than it was just a decade ago. The average fee for a day pupil is just over £14,000 a year, according to data from the Independent Schools Council (ISC), while annual boarding school fees average more than £33,000.

Daunting cost? Or worthwhile investment?

Despite this, the ISC census reveals a record number of UK students, nearly 530,000, are in private education in the UK. This is obviously because the return on investment in a private education is so compelling to many parents.

Pupils at private schools significantly outperform the national and global averages academically, despite the fact that fewer than half of them are academically selective. That may explain why many affluent parents who have financial burdens continue to place such importance on private education despite the financial strain and worry it imposes.

However, there is some good news. Private school attendance numbers continue to rise despite the increased cost because more than £1 billion a year of financial assistance is now available to parents, enabling one in three students to have their school fees reduced or even waived.

If your child has a particular aptitude for sport or is talented artistically or musically, then it is worth investigating the availability of bursaries and scholarships. In certain cases, this financial assistance can cover up to 50% of the fees.

Nevertheless, school fees represent a considerable portion of most families’ incomes and therefore require careful planning and management. With research showing that a full private education, followed by university, can cost upwards of £300,000, it is evident that, aside from buying a home, a child’s education is likely to be one of the most expensive investments most parents will ever make.

Too many choices? Or flexible and tailored options?

Given the wide, and sometimes bewildering, range of savings and investment products available for school fees planning, parents may wish to consult with their wealth manager to identify which best meets their particular needs.

There are three main types of tax-efficient school fee plans:

• Capital schemes – this entails investing a lump sum into a guaranteed fund.
• Income or regular savings schemes – you make a regular monthly or annual payment to a savings scheme.
• Combined schemes – you invest a lump sum when you start the plan and supplement it with additional payments over a short term.

In general terms, it is likely that paying school fees out of monthly income will be the most expensive approach as neither tax relief nor salary sacrifice are directly available. More favourable options would be to start saving and investing funds for school fees well in advance, using tax-efficient options such as junior ISAs, or seeking support from family, such as grandparents.

Visiting the bank of Grandma and Grandad?

Indeed, helping with school fees may be an effective way for grandparents to reduce Inheritance Tax (IHT). Provided that grandparents live for at least seven years after making a lump sum gift, the amount will not be included as part of their estate for the purposes of calculating IHT and the amount they can gift is unlimited.

Furthermore, grandparents can give away up to £3,000 each year tax-free, using their annual gift allowance, which will not be included in their estate when it comes to calculating IHT liability. If your child is lucky enough to have four grandparents, that adds up to a £12,000 contribution every year.

Take what’s on offer? Or negotiate a good deal?

While most schools will expect fees to be paid at the start of each term, parents may be able to negotiate a monthly direct debit payment or other instalment system. Furthermore, if parents wish to pay school fees from savings rather than income, and can pay a lump sum up front, they may be able to negotiate a discount.

It is worth remembering, too, that many independent schools offer reduced fees if two or more children from the same family attend the same school. Another option for parents whose children are at boarding school is to consider flexi-boarding. This is an intermediate step between full boarding and attending as a day pupil. Parents typically agree a certain number of nights when their children will stay overnight at the school to fit in with extra-curricular activities or to coincide with evenings when the parents are away from home for work purposes. Flexi- and weekly boarding is growing in popularity and now accounts for 18% of all boarders.

Shopping around is always a worthwhile strategy. Many parents make a strategic decision to relocate in order to bring down the costs of education. This can be to take advantage of the substantial regional differences in annual fees; the South West of England has the highest fees in the country, followed by London and the South East, while the North West has the lowest. Alternatively, parents might choose to pull out of the private school system and instead buy a house in the catchment area of a top state school such as a grammar.

As with all such investments, it is vital that as a parent, you seek professional advice to ensure you secure the best financial plan to suit your particular circumstances. With the right plan in place, you can begin to make the greatest investment of your lifetime; your children’s future.