A good education can be predictably expensive. Parents can now expect to pay upwards of £200,000 in order to secure their children a private education, from nursery to upper sixth.
The onset of autumn is synonymous with the start of the new school year and parents of young children, or prospective parents, might be looking ahead to a time when they will need to start thinking about fees themselves. Figures from the Independent Schools Council (ISC) provide an annually updated overview of how much this can be expected to cost.
School fees increased, on average, 3.5 per cent in 2017. The average day fee, which includes boarding schools, is now £4,702 a term or £14,106 a year. The average boarding fee has increased at a slightly faster rate – 4.1 per cent - and is now £10,753 a term, or £32,259 a year.
The amount required to secure a private education can seem daunting but the sooner contributions can be made, ideally into a tax-efficient savings account, the easier it will be to meet the rising costs.
The most obvious place to start is with an ISA. The maximum tax-free annual contribution to an ISA is £20,000. Income and capital can be withdrawn any time without liability for income tax, capital gains tax or other penalties. Money which is taken out during the tax year can then be repaid into the same ISA without counting towards the annual subscription limit.
The earlier that regular contributions into an ISA account can be established, the better. A £250 contribution every month, at an assumed annual interest rate of 3.9 per cent (the current dividend yield of the FTSE 100 index), would generate almost £37,000 within 10 years.
In order to cover the full estimated cost of private school, however, would require monthly contributions of roughly £1,400 over a 10-year period at an annual rate of 3.9 per cent. If 15 years can be set aside for saving for school fees, the amount required drops to around £900 a month. Allocating a longer timeframe will obviously help and so too will combine regular savings with a starting lump sum.
Contributing a lump sum from the outset also makes a significant difference to the long-term result. A starting pot of £20,000 will generate more than £66,000, under the same circumstances with a monthly contribution of £250, assuming yields remain constant.
Often, lump sums such as these will come from grandparents. An understanding of the rules surrounding inheritance tax (IHT) can help with this arrangement and provide a boost to saving for school fees. For example, you can give away £3,000 worth of gifts each tax year. There is also the seven-year rule surrounding gifts. If the donor makes a donation and then survives for seven years after this, the donation will not incur IHT. There is a sliding scale applied to gifts which fall within this seven-year period.
Saving for a private education can seem insurmountable, particularly given the amounts will only continue to increase. There are plenty of exemptions and benefits which can be utilised to help matters but a lot will depend on how much time is allocated. The bottom line is that, the earlier one can start planning for this, the better.
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Tax treatment depends on the individual circumstances and may be subject to change in the future.