University Costs (2): Building up Savings for Future Education Costs
Having a fund available to cover the costs of university can save your child from having to take out an expensive student loan. According to The Sunday Times, interest rates of up to 4.6% on today’s student loans mean that until a graduate is earning £51,000 their loan repayments are only going towards interest, not the underlying debt. Graduates will therefore make loan repayments of 9% of their salary over £21,000 for decades.
The main options for building a university fund are:
Your own ISA
Putting savings aside in an ISA is tax-effective and administratively simple. Once in an ISA, savings are subject to no additional income tax or capital gains tax. The money can be taken out of the ISA whenever required with no tax charge, and for any reason. You, or any other friend or member of the family, can put money aside in an ISA then withdraw it and gift it to the child when required to pay university fees. Within an ISA you can invest in cash or stocks and shares, depending on your investment timescale (at least five years is suggested for stocks and shares) and your attitude to investment risk. The ISA allowance this year is £15,240 and is going up to £20,000 next tax year (from 6 April 2017).
A Junior ISA
A Junior ISA is held in the child’s name rather than your own. The annual allowance is £4,080, which can come from you or other friends or family members. The money can be invested in cash or stocks and shares. The child becomes responsible for looking after the money from the age of 16. It should be noted it’s not possible to access the money until the child is 18. At that point the money is legally theirs and, while it is convenient timing for university costs, they can spend it as they choose or leave it invested in an adult ISA in their own name.
National Savings & Investments (NS&I)
NS&I are government backed savings. Children’s Bonds and Premium Bonds are both tax-free and can be bought by parents, guardians, grandparents or great-grandparents for a child under 16. Children’s Bonds currently pay 2.5% interest. Premium Bonds do not pay interest but are entered into a monthly prize draw for tax-free cash prizes.
Investments outside of ISAs
Investments outside of ISAs offer similar flexibility – i.e. the money can be encashed and given to the child whenever required – but without the tax benefits.
It might be more tax-efficient to hold the investments in trust for the child or in an account designated for their benefit. Under this arrangement any capital gains count towards the child’s capital gains tax exemption rather than your own, potentially saving capital gains tax. Investment income of up to £100 a year is classed as the child’s for tax purposes; however, when an account is set up by a parent income over this threshold is taxed as the parent’s instead. You should also be aware that, as with the Junior ISA, the child becomes legally entitled to money held in a bare trust or designated account at age 18 and can spend it as they wish.
Investment bonds can be held onshore or offshore, can be gifted to the child shortly before they are encashed or effected from outset for the benefit of the child, and can be held directly or held in trust. The taxation differs in each circumstance and the most suitable set-up depends on your personal tax position. As investment bonds are not as straightforward, ISAs would usually be considered first.
For personalised advice on building a fund to meet university costs please contact Richard Higgs, Chartered Financial Planner, on 0117 966 5699 or Richard.email@example.com.