Can I afford to send my child to an Independent School?

A recent survey commissioned by Woolworths predicted the cost of raising your child from birth, going to a private school and attending a university, to be over £244,000. With the cost private education increasing far more than the rate of inflation (5.7% in 2006), this figure is expected to grow even more.

Despite this rising cost, more and more of you are sending your children to independent and private schools. A recent Independent School Council (ISC) report shows that since 2000, the number attending independent schools has continued increasing to 7% of schoolchildren throughout the UK, with an increase to 10% in London.

According to a Halifax survey, the average school fees now equal 35% of average earnings and this has priced out many occupations out of affording a private education, including police officers, teachers, pharmacists, journalists and architects. Worryingly, the survey concluded that, based on this rate, you would need to earn £300,000 before tax to pay for a private education for your children between the ages of 4 and 18.

If you don’t earn £300,000 per annum, how do you fund your children’s private school education? Here we explore some options.

Plan Ahead

Start saving as soon as your child is born. The Child Trust Fund is a great way to start this saving process. However, with a maximum cap of £1,200 pa, this will only partially help pay for a private schooling.

Most education commentators agree that if you want to send your children to a private school, you need to take at least a 10-year approach in order to make any real difference to future school fees. However, you are still required to make a sizable monthly contribution.

Amount saved each month	£300	£400	£500	£600	£700	£800
After 10 years you would have	£51,606	£68,808	£86,009	£103,211	£120,413	£137,615

Calculations are indicative only. The calculation is based on 7% rate of return, compound interest, capitalised on an annual basis and does not take into account taxation.

To put this figure into perspective, your £300 per month savings would just about cover your fees to send one of your children for five years of education (based on average annual school fees of £9,777 for both day and boarding schools). Therefore, you need to invest £600 per month to send two of your children to private school for 5 years. See Be Selective

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One of the best ways to invest with this type of sum is through an Individual Savings Accounts (ISA). For more in-depth details, see our ISA section; you can simply invest up to £7,000 per tax year free of income tax and capital gains tax.

With a 10-year long-term approach, most financial commentators would recommend "investment lifestyling". Within the final five years before funds are needed to pay school fees, your children’s investments would be switched from investments linked to shares to less risky environments, such as Government bonds, fixed interest securities and cash deposits. This is to reduce the chance of your children's savings losing value towards the end of the 10 years.

Of course, it is not enough to buy any old ISA: you must consider the underlying assets that make up the investment, since it is the quality of the funds you invest in that will determine how much your final investment will be worth. Please see an IFA for investment advice.

Be Selective

With the rising cost of private education, many parents like you are not only being selective about where to send you children but also which years of your children's schooling that you want to save for. Some of you may have chosen to spend your savings on just a few key years: primary in the hope of your child winning a coveted place at a selective state secondary or grammar school, from 11 to 16 during the vital GCSE years.

However, this approach can be risky as there no guarantees that paying for a good primary education will ensure your child achieves a high enough score to win a place at the secondary schools of your choice. This can be particularly risky as most private schools are oversubscribed which means that you are not guaranteed a place for your children when they switch to a state school at 11.

Therefore, again, plan ahead. The earlier you apply for the oversubscribed school of your choice, the better the chance of gaining a place.

Relocate near a Good School

Property premiums in 'good school' catchment areas are proving little deterrent to parents who want to give their children a head-start in life, according to the Royal Institution of Chartered Surveyors (RICS) in their latest survey. Despite high demand for property in 'good school' catchment areas, the value-added-premium that many of you are willing to pay for the privilege is falling.

When the survey was last conducted in August 2003, estate agents suggested buyers were willing to pay a 12% premium. With the exception of London, this percentage figure has fallen to 8%, with the premium for primary schools lower than for secondary schools. Due to rising house prices, the actual figure being paid has remained unchanged at £16,000. Although in some areas, you could can expect to pay up to £42,000 to secure a place at the right school.

But there are risks. Proposals by Brighton and Hove council to introduce "post code lotteries" and abolish local priority for people who live close to good state schools, may also force more families to make the financial sacrifice necessary to fund independent sector education. The idea is backed by the Specialist Schools and Academies Trust which represents 2,600 of the 2,950 state secondary schools in England. So expect more to follow.

This is a worrying development as catchment areas can change from year to year, often within just a few hundred metres. Therefore, it is possible that you could pay more for a house which then could lose its "school catchment area cachet" and watch it lower in value as a result.

Despite these proposals, it could still be worthwhile paying a property premium to live in the catchment area. Private schools are also often oversubscribed, so it is a way for you to minimise your risk.

Use your Property

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Most of you will not have £244,000 up your sleeve but many homeowners, particularly in the South East,  have at least part of this amount of wealth in their property; this money has the added advantage of being tax-free.

The re-mortgaging option is not a viable option if you are unable to pay the higher interest charge or you are already mortgaged to the hilt. Re-mortgaging can also be expensive if you have fixed rate or discounted mortgage as many banks charge exit penalties if they have to arrange another loan.

However, opting for an offset mortgage can be an attractive way of paying school fees.  You can arrange a borrowing facility to cover your mortgage as well as the costs of education and then keep the school fees part of a linked savings account so money is available as and when required.

For example, with a mortgage of £100,000 and £20,000 worth of savings set aside for your children’s education, you can save money by only paying interest on the difference between the amount borrowed and the amount in the linked savings account. Therefore, if you offset the £20,000 in savings against the mortgage, you will only pay mortgage interest on £80,000 while the savings are in the account. You will only pay interest on the money when you take it out to pay school fees. This is far cheaper than borrowing the entire amount at the start.

The main disadvantage of remortgaging is that it erodes the equity you own in your home.

Inheritance Tax and School Fees

In Britain today, school fees and inheritance tax are the two of the biggest financial drains on middle-income families. However, there is a way to combine the two problems to get one win - win solution for all.

Asking your parents or grandparents to help with children’s school fees can make a huge difference to your finances. And, with the correct tax planning, this could also reduce the burden of Inheritance Tax on their estate by 40% of the gifts made. See Children and Inheritance Tax

There are many schemes available; however, for school fees, one that has been used successfully is called a Discounted Gift Trust. Ask your IFA for more details.

Consider Scholarships, Bursaries and Grants

Get as much financial help as possible. Recent figures from the ISC suggest that 32.4% of children attending independent school received help with their fees in 2006. The majority of these pupils received scholarships or bursaries from their school. The value of this assistance was over £286,000.

You can generally apply for scholarships that will cover between 10 per cent and 25 per cent of your children's fees. However, some scholarships will pay up to 50 or even 100 per cent of the fees for academic, sporting, artistic or musical excellence depending on the school.

Bursaries, on the other hand, are means-tested. Bursaries are intended to provide financial support for pupils who could not otherwise afford the full cost but who demonstrate ability and potential to benefit from studying at an independent school. Bursaries are available for all independent schools and are open to all eligible applicants regardless of gender, age, race, nationality or ethnic origin.

The amount awarded from bursaries can vary from 25 per cent to the full cost of fees, with priority often given to children already at the school whose parents can no longer afford the fees.

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In addition, you may apply for a grant with one of numerous educational charities. These charities have been set up, in most cases, by benefactors to help families who can demonstrate a genuine need for independent education or to help a child to complete the current stage of education in the event of an unforeseen change of circumstances.

Certain employers and professions, including international banks, the clergy, diplomats and the Armed Forces have allowances for school fees. So ask your employer if they have anything in place. 

There is one small drawback of applying for assistance in that you will be asked to provide evidence of income and assets. Therefore, if you don’t want other people prying into your affairs, you shouldn’t apply.

If you are unable to pay the entire school fees upfront at the beginning of the school term, you may ask the bursar if the school allows parents to pay in monthly instalments. Many schools are increasingly turning to direct debits and standing orders to help spread the cost of the school fees. 

Ask for a Discount/ Barter

Alternatively, if you managed to save enough for the school fees, you may ask for a discount if making an advance payment. Some schools operate a “composition fees" scheme whereby fees are paid by a capital sum in advance direct to them in return for a discount on the fees. Independent Schools, like most businesses, are cash strapped, most will welcome payment in advance. It is also worth considering that if you have more than one child going to the same school, discounts also may be available to you.

You could try to barter your time or services for reduced school fees. For example, you may own a stationary shop where you can get discount on bulk purchases. Why not ask the school if you can donate stationary in exchange for a reduction in school fees. This can apply to almost anything the school uses: sporting facilities, books, furniture, etc…

If you don’t own a business but have a profession that could be of use to the school, offer your services. For example, if you are a fundraiser by profession, you may wish to volunteer your services and raise funds for the school, or if you are gardener, offer to plant shrubs and trees for the schoolyard, or if you are an Accountant, offer to do help out with their ledgers, etc…the list is endless.

Insurance

Life insurance offers the ultimate family protection. Consider insuring the cost of your children's future school fees (say, £175,000).  To ensure the security of these savings in the unlikely event of your death, you may consider opending aTrust to your beneficiaries so it falls outside your estate for the purposes of calculating Inheritance Tax. It is even possible to leave the money to the school, thus sidestepping the recent anti-trust legislation. 

A little known fact is that you can now get income tax relief at 40% on your life assurance premiums by arranging your policy via a personal pension arrangement. This opportunity is available for everyone, even members of company pension schemes or non-workers. Speak to your IFA.

You may wish to consider crital illness cover should you suffer or are diagnosed with a critical illness. A lump sum payment through this type of cover can give you the means to help pay for your children's schooling as well as home alterations or specialist equipment, cover day to day expenses, fund private treatment or provide an income.  Many people combine this with their life insurance.

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Let the taxman pay!

Wouldn’t it be nice if the taxman paid for your children’s school fees? Well, it is possible following a change to pension rules last year April.

The loophole, introduced in April 2006, allows you to receive tax relief on your pension contributions – up to £4,000 for every £10,000 paid in. This means that you can take a quarter of your fund as a tax-free lump sum when you reach 50, or, after 2010, when you reach 55.

This tax-free cash can then be used for any purpose, including the payment of school fees or return of money you had borrowed to fund education.

Let's take an example of Mr Neul who is 48 years old. He wants to send his daughter Collette to an independent school from age 11 to 16. He pays £10,000 per year for five years totalling £50,000. As he is entitled to take a quarter of his pension as a tax-free lump sum once he reaches 50, he would need a pension fund of £200,000 for the 25 per cent tax-free lump sum to cover these fees. Since Mr Neul has been a member of a good company pension scheme for over 20 years and has accumulated just over £200,000 in his pension; he has managed to pay for ALL his daughter’s education with his tax-free lump sum from his pension.

If you already have around £200,000 in your fund, you would not even have to pay in any extra money to your pension to be able to repay this £50,000 of school fees, assuming modest growth over the next decade. This is because you could easily cover this with the £58,320 you will receive in tax relief on pension contributions.

Under another new tax rule set up last April, you could also set up a second pension and pay in £947.70 a month after basic tax relief.  This would only cost you £729 a month after you claim the higher-rate tax back. Therefore, the total cost to you over 10 years would be £87,480, while the cost to the Chancellor would be £58,320. This £24 a day may seem steep, but the entire cost of the fees would be met by tax relief and when you reach 65 you could also look forward to an additional pension of up to £15,000 a year with the £200,000 you would have left in your pension fund.

This information comes with a huge warning. You have to bear in mind that taking a lump sum early will mean a significantly reduced pension on retirement unless you are able to top up your pension after your children have left school. Please see your local IFA for more details.

Five years ago average private school fees were equivalent to 30 per cent of average earnings, while today they account for 35 per cent, according to figures from Halifax. The deterioration in affordability has been driven by a 43 per cent increase in average private school fees since 2000, almost double the 24 per cent rise in average earnings over the same period.

These high costs will inevitably result in some families struggling to make ends meet (Telegraph). If this has happened to you, seek advice early. Make an appointment with your Bursar and Head Teacher and talk through the problem. Many schools offer grants and bursaries to help pay the fees of pupils in difficult circumstances. It is always worth asking what may be available!

If you are going through a divorce, it is also possible to arrange a specific financial settlement within the terms of a divorce. The money is typically transferred into a Trust administered by a solicitor and the respective parents for the purpose of funding all or part of a child's school fees. 

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What financial assistance is available?
How can I set up a trust fund for my children's education?