How To Pay The School Fees

With A-level results out today we’re sharing an Article Rob wrote for Independent School Parent Magazine: ‘How to pay the School fees’

School fees planning

Effective school fees planning is the art of making the necessary, but painful, a little less painful. The question is always how best can I utilise the money I have to meet the demands of both now and the future, and how can I be more certain that there won’t be a shortfall.

Bucket strategy

In the finance world, we call this liability driven investing but I prefer to call it “bucket investing”. The concept is very straightforward; the school fees that are payable in the next three years form one bucket, fees for year four and five form another, and so on and so forth until your children leave for university.

Each bucket is a separate account and each has a different level of investment risk. So for school fees that are payable until the end of 2015, we, at Plutus Wealth Management, would take no risk at all. We exchange the potential for growth for certainty because the certainty is the most important thing with so short a time to when the bills are payable.  Bucket 2 is for 2016 and 2017 fees. We can make a good estimation of what the fees will be in those years and we’ll hold a portfolio that, if you imagine risk being on a scale of 1 to 10, is at the lower end, say 3 or 4. That means that you’re likely to get a return above what you would get in a bank account.  Bucket 3 is for 2018-2020. We would be taking risk that is 5 or 6 on the scale and crucially as the years go by reducing that risk so that it starts to look like bucket 2 and then bucket 1 as we get closer and closer to the payment dates.  Bucket 4 holds all the money for 2021 and onwards. This is where the highest level of risk is taken.

This is a very simple strategy and what it achieves is remarkable; the parents are in much more control over their planning and can see where there’s a shortfall and where there isn’t, and can act accordingly. Traditionally people have money in investments and ISAs that form a single pot and from there the regular school fees are payable. But this doesn’t answer the key questions like: is the money going to run out or what happens if the investment values fall? In short, is it all going to be ok?

SAs, JISAs and tax

Both parents should always utilise their ISA allowances (£11,520 with up to half in a cash ISA and the balance in an investment ISA), and additional investments should be held in the lower tax payer’s name. With further spare cash up to £3,600 can be held in junior ISAs in the child’s name where they will have access to it from age 18, perhaps as part of the university fees planning.

Inflation

School fees inflation is a stubborn beast. Each year fees increase over and above the general rate of inflation and there are plenty of good reasons as to why that’s the case and will continue to do so. It’s vital in the planning that you take into account inflation – in simple terms if fees inflation is 4 per cent then investing in cash won’t cut the mustard but investing in a range of big solid blue chip companies probably will because each year these big companies pay a dividend that should match the price rises. If inflation is higher, say 8 per cent, then you’ll need to consider taking some more risk just to keep up with the rising costs.

Property and remortgaging

It’s always best to use savings and investments to pay the fees but if that simply isn’t possible then you could consider remortgaging. With interest rates low, and set to be low for the foreseeable future increasing your mortgage to pay for each year’s fees isn’t a huge problem, but you need to stay in control of the costs and look to pay off the additional debt as soon as possible. Never re-mortgage too much and never release cash for the purpose of investing – it’s a recipe for disaster.

Further ahead

We’ll always analyse the possibilities for university. For some it will be possible to plan the finances so that full tuition fees and costs of living have been saved for, whilst for others it’s a case of concentrating on the school fees in the knowledge that there are student loan options available for your children when the time comes.

Reviewing process

Finally, it is really important to review progress of your fees planning. It only takes a couple of hours a year to stay on top of it. Taking the time to address it means tactical decisions can be made in tandem with your adviser to either eke out better returns or reduce risk.