Updated: 12 August 2020
Jasmine Birtles is a TV and newspaper journalist and personal finance expert. In her new column she’ll be helping you get the most from your investment and reach your personal goals.
Passing the exams is the easy part. It’s saving for university that really hurts!
It costs the best part of £45,000 to do a three-year degree in the UK right now. That’s set to go up to at least £60,000 in the next ten years. So it’s not surprising that some parents start saving for their children’s university as soon as, or even before, their children are born.
However, even if you don’t have serious spare cash to put aside for your offspring’s education, there are ways to maximize the money you put in. Follow these steps and you’ll be able to help your kids even with limited resources.
Obviously the more tax you can save on your investments the better, so use ISA allowances as much as possible when saving for university.
Each child has an annual JISA (Junior Individual Savings Account) limit of £4,250 per tax year until they turn 18. Even if you don’t have that much to put in each year, just investing regular, small amounts each month will mount up if you put it in the right products.
Happily, children have time on their side when it comes to investing. If you start when they’re babies they have a good 18 years for the investment to grow, so you can use a stocks and shares (equity) JISA for them. The returns on these products are much higher than you would get on the average bank or building society cash version. Simple index tracking funds tend to be the cheapest and often the best performing. Encourage the grandparents, friends and other family members to add to the pot at birthdays and Christmas.
Of course, the JISA is in your child’s name and it’s not certain that they will use it for university by the time they get their hands on it at age 18. But if you spend some time educating them in the value of saving and help them to respect money then, even if they don’t go to university, they will still know to put that cash into something sensible once they come of age.
You also can take out an ISA for yourself and you have an annual limit of £20,000 per tax year. There are a few ISAs to choose from now including the Innovative Finance ISA which enables you put money into an online lending platform, such as Funding Circle, within an ISA wrapper. So any gains you make with your lending come to you tax-free.
If you put your money into the Funding Circle ‘Balanced’ ISA, that has a projected return of 6-7%. Then a monthly deposit of just £170 at 6% annual return, would give you £66,000 in 18 years, and that doesn’t even use up your whole ISA allowance.
There are, of course, investment products specifically designed for parents looking to save for their child’s university costs. Some of these may do well but on the whole you should be suspicious of any financial product that has clearly been packaged up for, and advertised to, a particular market. These products often have high fees attached to them and tend to be more about the marketing than the market.
Some Friendly Societies offer specialist products like these but their fees tend to be high. Similarly, well-known investment firms offer specialist products that involve a choice of managed investment trusts that you could put your money into. Usually the minimum monthly investment is £25 or £250 one-off lump sum. Again, though, watch their fees as managed funds are generally more expensive than simple index-tracking funds.
One of the best ways to help your kids cope financially when they get to university is to encourage them to earn and save while they are teenagers. They really need the help too, as research by the savings association TISA has found that three in five 14-16 year olds borrow money to pay for something, even though four in five of those surveyed receive pocket money and a third of them have a part time job.
So start by helping them get a Saturday job in a local tea shop, car wash or supermarket. Help them fill in application forms, take them to the interview and even contact potential employers yourself. Then help them set up their own savings accounts, showing them how their money can grow over time if they leave it there. If you have the money you could even promise to match any savings they accumulate once they get to university.
To find out more about the Funding Circle ISA visit fundingcircle.com/innovative-finance-isa.
Your actual return may be higher or lower and your capital is at risk. The tax-free entitlement of an ISA depends on your individual circumstances and may change.
The views expressed here belong to the author and do not represent those of Funding Circle. Funding Circle is not authorised to, and does not, provide investment, tax, legal or regulatory advice.
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