Rising private school fees have long been a source of anxiety and the burden is likely to get very much heavier still in the years ahead. Here, Carl Green, Director, Financial Planning, at Evelyn Partners, offers must-read tips to help families maintain their educational aspirations whatever the future holds.
Private school fees currently average £6,021 per term for day pupils and £14,153 per term for boarders, amounting to £18,063 and £42,459 per year respectively. Given that fees for the 2023/24 academic year increased by an average 8% from the previous yeari, talk of the removal of the charity status from independent schools has been alarming indeed for parents – a move that would lead to 20% VAT being added on at a stroke.
Private schooling has been eating up more and more of families’ wealth, but few see these fees as a luxury which can be cut (and the thought of swapping to state schooling once private education has begun and children are settled in is something that the vast majority of parents would want to avoid at all costs). The question therefore is how to plan for hefty private school fees so that the burden can be borne long term and potentially for a number of children without the cost of investing in their future becoming too much of a worry.
The question therefore is how to plan for hefty private school fees so that the burden can be borne long term and potentially for a number of children without the cost of investing in their future becoming too much of a worry
Although it’s a long-term, expensive commitment, with effective planning it is possible to pay private school fees without too much financial strain and budget for significant increases besides.
Consider making fees a family affair
Aunts, uncles, and grandparents often help pay school fees along with other family members. By providing this financial assistance, they can also help to mitigate their own future inheritance tax (IHT) liability because anyone who pays towards a child’s school fees can classify the payments as regular gifts from surplus income. As long as these ‘gifts’ do not affect their own lifestyle, they are exempt from IHT.
Many parents also want to fund their child’s education themselves. We often see clients with a small child or baby on the way coming to us for suggestions on how to fund the cost of their education
Many parents also want to fund their child’s education themselves. We often see clients with a small child or baby on the way coming to us for suggestions on how to fund the cost of their education. Their salary may well increase over time, but it’s difficult to predict the amount or frequency of these raises. They need to establish how they will continue to make the payments, as this is likely to be combined with ongoing fee increases.
Make sure you will have enough money
It can be difficult to predict exactly how much money you will have in the future and how much private school fees will rise to. But with the help of a financial planner and cashflow modelling, you can make reasonable and educated assumptions to see if you have enough money to make the payments.
Cashflow modelling software helps to analyse your income, expenses, savings and assets.
A financial planner can then consider your future goals, such as paying for a child’s education, and create a projection of your finances.
Financial planners can use available statistics to estimate future school fees costs. They can even include the potential VAT addition as part of this exercise, while also taking inflation and investment growth into account
Financial planners can use available statistics to estimate future school fees costs. They can even include the potential VAT addition as part of this exercise, while also taking inflation and investment growth into account.
A financial planner will then assess the fees in conjunction with your current financial situation to predict how much you can afford to pay and for how long.
Top Tip
Lee Goggin
Co-Founder
Think about using a trust
After determining if you can afford private school fees, you need to think about how you will make the payments. To fund the fees long term, investment growth might be required. It is, however, important to remember that with any investment you might receive back less than you pay in.
A simple option is to set up a what is known as a ‘bare trust’ on behalf of the child. This means you, or other family members, ‘gift’ the money to the child, but you have full control over the assets and where they are invested until the child is aged 18. With professional advice, these trusts are straightforward and cost-effective.
Bare trusts established on behalf of a child are tax-efficient too. The beneficiary (the child) owns the trust assets and these are taxed as if they owned them directly
Bare trusts established on behalf of a child are tax-efficient too. The beneficiary (the child) owns the trust assets and these are taxed as if they owned them directly. This means that you can use the child’s income tax and capital gains tax allowances. These allowances are typically available in full for children because they do not usually have other taxable income.
Investments in a bare trust for a child can be highly tax-efficient. The income generated would only be taxed if it exceeds the child’s personal allowance, personal savings allowance, or dividend allowance.
Access your pension to fund fees
If you or your partner are slightly more advanced in life, it is worth knowing that you can withdraw 25% of your pension value as a tax-free lump sum after age 55 (increasing to 57 in 2028). You could consider putting this money towards a private education.
Also, this could be particularly tax-efficient if you are a higher or additional rate taxpayer. By withdrawing this lump sum (also known as the pension commencement lump sum), you will not have any further tax to pay and the remaining 75% could be used to fund your retirement.
Although withdrawing a tax-free lump sum from your pension can be an effective way to pay for school fees, it’s important to remember that this could have a significant impact on your overall level of retirement income
Although withdrawing a tax-free lump sum from your pension can be an effective way to pay for school fees, it’s important to remember that this could have a significant impact on your overall level of retirement income. A financial planner will be able to tell you if making this withdrawal is a viable option.
Conclusion: Look at the issue holistically
Private school fees are in fact just the kind of challenge that financial planners really enjoy thinking through with their clients as the solutions can be tailored very precisely and the relief parents then feel is tangiblePrivate school fees are in fact just the kind of challenge that financial planners really enjoy thinking through with their clients as the solutions can be tailored very precisely and the relief parents then feel is tangible. Even if you feel you have a decent plan it may well be worth ‘going back to school’ to see if there is anything you can do with a professional wealth planner to improve it further. It is very often the case that one ‘could do better’.
Important information
The investment strategy and financial planning explanations of this piece are for informational purposes only, may represent only one view, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment and financial planning decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.
