Whitehaven News

Banking on a bright academic future

By Derek Baty, of Armstrong Watson

Last updated 10:21, Monday, 31 March 2008

In last week’s article I looked at the financial planning opportunity of funding a personal pension on behalf of a child and the massive boost this could give to their retirement benefits.

With access restricted until age 55, what happens if funds are needed much earlier, say at 18, to help fund university costs?

A new student starting a course this year will be charged a maximum of £3,145 for tuition fees.

However, these fees will be dwarfed by accommodation and living expenses which are by far the biggest costs for students.

The National Union of Students estimates it will cost the average student more than £12,000 per year in living costs.

The Government has introduced a system of student loans which can help with these costs, but can mean the student starts his or her working life with large debts.

It may be that parents can afford to subsidise their child’s university costs directly from surplus income, but for most this may not be possible and therefore planning is needed.

One option may be to earmark funds built up in a Child Trust Fund (CTF). Since the beginning of 2005, parents of all babies born in the UK on or after September 1, 2002 have been eligible to receive Child Trust Fund vouchers, worth £250, from the Government.

Further vouchers for the same amount are sent to parents when their children reach age seven. Family members or friends can also add up to £1,200 per year. Any gains are tax free and at 18 the child has full access to the capital.

However, should you wish to have more control over how any cash is distributed, other options may be more suitable. These include ISA and collective investments. Regular savings to either of these vehicles will benefit from pound cost averaging to smooth out the ups and downs of the stockmarket (see article of March 7) and even modest monthly amounts, from child benefit for example, can produce sufficient funds at 18 to help with costs and, perhaps just as importantly, allow the parent to retain control of the capital.

By saving just £50 a month for 18 years from the birth of your child, you could create a pot worth £26,640 (source: Morningstar, based on the FTSE All Share index from August 1, 1989 to August 1, 2007).

If the additional risk of equity markets makes you uncomfortable, then making use of your cash ISA allowance each year can also build into a sizeable fund.

The common theme throughout the above has been planning ahead and starting to save at an early age. However, not everyone is in a position to be able to save –so what if you’ve left it too late? A personal loan or releasing any equity from your home may be an alternative.

In any event, good independent financial advice can smooth the path to university and possibly avoid your child starting their career weighed down by student debt.

Derek Baty is a financial planning consultant with Armstrong Watson.