The financial quest towards an empty nest!

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The start of the second university term –  that time of year again when supermarkets shelves are devoid of baked beans, budget cookbooks are on super fast delivery from Amazon…and the Bank of Mum&Dad rather nervously looks at its balance sheet.

In addition to academic demands, significant financial pressures are typically part and parcel of today’s student life. Most students do not receive grants but instead take out loans to cover both tuition fees and living costs, the latter being restricted if the parental household income is high or if the student is living at home.

A graduate leaving college in three years time could very easily end up with a loan of almost £50,000. The loan is then repaid with a 9% levy on any earnings over £21000. Repayments are constrained by income but can continue for many years (up to a 30 year maximum). It is, of course, possible to repay the loans more quickly if spare capital is available but, very often, this is not an option, particularly if young people are attempting to save up money to buy their first home.

So what can parents do to alleviate educational money woes? Well, obviously, many will not have the means to do anything financial to assist – other than accept that their offspring are more likely to continue to live with them for many more years to come. But those who do have greater financial means should consider putting money aside early to fund a child’s university education, spreading the burden over as long a period as possible.

By investing a small amount every month between now and the day they leave home, it is possible to ensure that children have a “cash cushion” to pay their fees and are as unburdened by debt as possible by the time they enter the working world (although in such cases, undying gratitude to the folks is not guaranteed!).

Most parents will prefer either to retain these savings themselves until they are happy to pass them over or, alternatively, depending on the investment product, you could consider a family trust. This is of particular use when grandparents are keen to contribute, as the use of a trust here, as part of a wider tax efficient plan for older generations, can offer significant inheritance tax benefits.

The type of investments that are the most suitable for paying university fees will vary according to your circumstances so good financial and investment advice is essential. A mix of the best cash ISAs and stocks and shares ISAs are likely to provide a good starting point unless you are fully utilising them for other purposes.

The greater your investment portfolio the better you will be able to ride out any income fluctuations. You may also want to consider insurance plans such as income protection, unemployment insurance and term insurance in the event of a reduction in your income stream due  to redundancy, illness, death of a parent or a business problem if you run your own business.

Business owners of Limited Companies have alternative tax efficient options in terms of funding their own children’s university fees, such as making a gift (counts as director’s remuneration, namely a benefit-in-kind, and so the cost of this is tax deductible for the company) or badging the course as job training, meaning fees and living costs can be tax deductible for a company, and also a tax-free benefit for the employee. The latter only applies however where your offspring are intending to join the family business and where their studies are linked to their intended role in the company.

However you fund their future, it may seem like a financial millstone but just think of that moment of pride when the mortarboard flies in the air.

And remember that if you do set up a savings plan and your child chooses not go to university, then you still have a nest egg to put towards their first house, car, wedding….or towards a well deserved round the world trip for you and your spouse!

 

 

Make maths your specialist subject…

Assuming your child is aged 11 and just starting high school…you would need to save £57,949 between now and the commencement of their 3 year degree course if you wished to cover all fees, housing and living expenses (that’s £621 / month assuming a 3% interest rate) Source:TrillionFund

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