Finance your child through university
Students may consider getting high exam grades the most important preparation for going to university, but parents face an equally daunting task - finding the huge sum of money needed to help their children through three or more years of college.
English students who started their first academic year last autumn will build up an average debt of £53,330 over the course of their degree, according to research by insurer LV=. Understandably, increasing numbers of 18-year-olds are questioning the value of higher education and whether the benefit of a degree outweighs the burden of the ensuing debt.
The biggest contributor to most students' debts is the annual tuition fee, which rose to a maximum of £9,000 in the 2012/13 academic year for English students (different rules apply to students who live in Scotland, Wales and Northern Ireland). Not surprisingly the number of people applying for university has dropped by 23.6% in England over the two years (2012/13 and 2013/14) since the introduction of higher fees, according to UCAS.
But however daunting they seem, tuition fees - which the student no longer has to pay upfront - are just the start of the costs faced by today's students. The next biggest expense is usually accommodation, which varies massively depending on where they choose to study and whether they live in university or private accommodation.
For example, an undergraduate at Sheffield University paid £260 a month for renting a room in a private house in the 2011/12 academic year, according to the website thestudentroom.co.uk, while a student at Queen Mary, University of London paid £464 a month.
The website surveyed students at 23 universities around the UK and found that most needed more than £500 a month to live off. The figures are a year old, so will have risen slightly now, but still give a good idea of how much to expect to spend in any given town.
Student loans are available to cover the cost of tuition fees and general living costs, but many parents - and grandparents - do not want their children or grandchildren starting their working lives laden with debt, and are keen to help financially.
Brian Dennehy, managing director of FundExpert.co.uk, says: "The key is to start saving, ideally monthly, as early as possible to build a fighting fund. Assume the university fees will cost you more than you currently think."
When saving on behalf of children, there is absolutely no need to pay tax: children born after 3 January 2011 or before September 2002 are eligible for a Junior ISA (JISA), while those born between 1 September 2002 and 2 January 2011 qualify for a child trust fund (CTF).
Both CTFs and JISAs can be used to protect cash savings and equity investments from tax, and enable parents, grandparents, other relatives and friends to contribute, subject to a maximum annual limit of £3,720 for both schemes. This money, however, will go to your child at 18 and it will be their choice, so parents may prefer to use their own higher ISA allowance of £11,520.
What kind of holdings are most appropriate? Darius McDermott, managing director of Chelsea Financial Services, says: "Cash is not a good investment at the moment and, unless your child is within a couple of years of going to university, you need to look at higher-risk investments to hopefully make better returns over the longer term."
He adds: "The longer you have before you need to access the pot of money, the more risk you can afford to take. As you get closer to the date when you need the money, you can move it into less risky investments."
Parents with between five and 18 years to accumulate capital could consider using investment trusts, unit trusts and open-ended investment companies (OEICs), investing through a fund platform or supermarket to benefit from the lowest charges.
For an 18-year timeframe, Danny Cox, head of financial planning with independent financial adviser Hargreaves Lansdown, recommends smaller companies and emerging markets funds, such as Cazenove UK Smaller Companies and JPMorgan Emerging Markets. "Both are run by first-class managers and with good consistent track records," he says.
For terms of nearer 10 years, he suggests equity income funds: "The power of reinvested dividends is a compelling story and the likes of Invesco Perpetual High Income or JO Hambro UK Equity Income are good choices here," he says.
"For terms of around five years, Newton Real Return is one of the few absolute return funds which has largely delivered to expectation. This should be less volatile than an equity income fund and therefore suit shorter investment terms."
An alternative might be Standard Life Global Absolute Return Strategies.
Gavin Haynes, managing director of Whitechurch Securities, says that Aberdeen Asset Management offers a savings plan which provides access to a wide selection of Aberdeen investment trusts.
"One option could be the Aberdeen UK Tracker Trust which is a low-cost passive trust (AMC 0.25%) that tracks the FTSE All Share index," he says. "More adventurous investors with a longer-term horizon may consider one of a number of Aberdeen's Asian investment trusts. I like the Edinburgh Dragon, managed by Hugh Youngs' highly experienced team."
Alternatively, the Baillie Gifford savings plan offers access to a selection of well-managed Baillie Gifford investment trusts. For investors seeking long-term stockmarket exposure, Haynes recommends Scottish Mortgage IT and Monks IT.
"These are both well-diversified global equity investment trusts that are ideal for a core stockmarket holding for someone investing for the long-term for their children," he explains.
Venture capital trusts
The tax benefits available on Venture Capital Trusts (VCTs) make them worth considering for those with larger amounts to invest, who are willing to take on a higher amount of risk.
VCTs invest in growing companies with up to 250 employees to aid their development into successful businesses and realise gains for investors. Provided you invest in a new share subscription, they attract 30% income tax relief, all dividends are free of income tax and all gains are free of capital gains tax if the VCT is held for a minimum of five years.
Jason Hollands, managing director of business development at Bestinvest, says: "The lowest-risk VCTs are those with a limited life or planned exit structure. These are designed to last for at least the minimum five-year holding period required to enable the investor to keep the tax break, and then wind up.
"That means the investment choices will be focused on mitigating downside risk, typically by investing in businesses which own a freehold asset on which the VCT can secure its financing, such as pubs and sports clubs, or businesses in receipt of government subsidies like renewable energy. Most of the return will de facto come from the tax reliefs." Hollands says Puma and Downing are the best managers for limited-life VCTs.
The government-led Student Loans Company provides a non-financially assessed loan that covers the cost of tuition fees up to £9,000 a year and maintenance costs of up to £7,675, depending on where the student goes to university. Students only have to start repaying it once they are earning £21,000 - a threshold that will rise in line with inflation from 2017.
Repayments on the student loans are designed to be affordable, at 9% of any amount earned over the threshold: so someone earning £22,000 gross a year would pay just £90 a year. But if your child goes on to be a big earner, earning say £50,000, they would pay back £2,610 a year. You can find out more about student loan repayments at studentloanrepayment.co.uk.
Students from low-income households may also be eligible for a non-repayable maintenance grant, worth up to £3,354 for courses starting this month. See gov.uk/student-finance/loans-and-grants for more information. It's also worth checking on websites such as turn2us.org.uk for details of bursaries or grants from charities.
While it may be possible to borrow at lower interest rates on your child's behalf by remortgaging your home, there is one final advantage of student loans which gives them the edge: the loan is automatically cancelled 30 years after the graduate becomes eligible to repay, and any outstanding debt is wiped off the slate.
In fact, the terms offered are so good that it may be worth letting your child apply for the maximum student loan, and using any lump sum you have accumulated for them as a deposit for their first home, or to pay for a car.
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult one.
Open-ended investment companies are hybrid investment funds that have some of the features of an investment trust and some of a unit trust. Like an investment trust, an Oeic issues shares but, unlike an investment trust which has a fixed number of shares in issue, like a unit trust, the fund manager of an Oeic can create and redeem (buy back and cancel) shares subject to demand, so new shares are created for investors who want to buy and the Oeic buys back shares from investors who want to sell. Also, Oeic pricing is easier to understand than unit trusts as Oeics only have one price to buy or sell (unit trusts have one price to buy the unit and another lower price when selling it back to the fund).
Venture Capital Trusts were introduced in 1995 to encourage private investments in the small-company sector by offering tax relief in return for a minimum investment commitment of five years. A VCT is a company, run by a fund manager, which invests in other companies with assets of no more than £7m that are unlisted (not quoted on a recognised stock exchange) but may be listed on the Alternative Investment Market (AIM) or plus with the aim of growing the companies and selling them or launching them on the stock market. Investors in new VCTs are offered desirable tax advantages and VCTs themselves are listed on the London Stock Exchange, with strict limits laid down by HM Revenue and Customs on what they can invest in and how much they can invest.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Changing mortgages without moving home. Property owners chiefly remortgage to get a better deal but some do so to release equity in their homes or to finance home improvements, the costs of which are added to the new mortgage. Even though you’re not moving house, you still need to engage solicitors, conveyancing and the new lender will require the property to be surveyed and valued.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
Permanent and absolute ownership and tenure of a property (residential or commercial) and/or land with freedom to dispose of it at will but with no time limit as to how long the property/land can be held (in perpetuity). Freehold is the opposite of leasehold.
Absolute return funds
Absolute return funds aim to deliver a positive (or ‘absolute’) return every year regardless of what happens in the stockmarket. Unlike traditional funds, they can take bets on shares falling, as well as rising. This is not to say they can’t fall in value; they do. However, over the years, they should have less volatile performance than traditional funds.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.