Tame the terror of school fees
By Chris Gilchrist    10th October 2007

If you have young children and want to send them to a private school, you face a big financial challenge. Start saving early - at least it will soften the blow.

There are some 650,000 children in private schools in the UK. That's about 7% more than there were 10 years ago, but in the past five years the number has remained static.

That could be because of the huge escalation in fees - they are up 40% in the past five years, which is way ahead of the rise in most people's earnings over the same period. Last year, the average rise in fees was 9.6%, over three times the rate of inflation.

Order free information on child savings plans here

How badly do you want it?
Still, many people want to get the best education for their kids, not least because recent research shows that this is a passport to the best universities. This is not because the unis are prejudiced, but because children educated privately achieve higher exam grades and have a wider range of social and educational abilities.

As for class, forget it. It's no longer the issue. At least a third of the children now in private schools have parents who went through the state educational system. They are simply being rational and trying to give their children the best start in life they can afford.

Which do you think would benefit your child most - a £100,000 bung at age 21 or an Oxbridge degree? Well, if your child seems to be reasonably bright, it's no contest - the Oxbridge (or equivalent) degree will enhance their lifetime earnings by more than ten times £100,000.

Compare our unit trust best buy recommendations here

Be realistic about what you need to save
So, what should you do if – like MoneyMaker readers Tim and Laura - you want to send your children to a private school but don't have enough dosh?

Tim and Laura had already started saving £25 a month each for their two sons (aged 4 and 1) but realise this isn't enough. They plan to raise it to £100 per month. Sadly, even this won't be enough, but it will make a dent in the bills.

Average day school fees are now £2,000 per term for juniors and £2,750 for seniors. Add in extras and by the time you've taken two boys from the age of 11 through to 18 it will have cost you £100,000.

Use our Model Portfolios to create an investment plan

School fee plan guidelines
So here is my recommended action plan for parents saving for school fees.

Start on day 1. Get compound interest working for you. A £50 per month savings plan with a 7.5% annual return will produce a sum of £2,000 after five years, £8,900 after 10 years and £16,500 after 15 years.

Forget the tax shelters. The Child Trust Fund is their money, not yours, at age 18 (and not earlier). Don't top up their CTF if you want to pay their fees. And don't use your own valuable tax-free ISA allowance either - aim to use this for your own retirement savings.

Order free information on child savings plans here

Grab any discounts on offer
Check composition fee deals. Most schools offer discounts for paying fees in advance, and these can be worthwhile if you are sure about which school. Discounts are usually 5-6% but this is net, and you'd have to earn 8.3% before tax at 40% to end up with 5% net.

Five-year discounts can be nearly 40%. Save up a lump sum and then buy a term at a discount. Manage your savings plans. Don't just 'buy and forget' - see below for a simple strategy that should lead to higher returns.

Use stock market plans. Over periods of five years or more, regular savings plans linked to shares usually do better than deposit-based plans. Build a cash buffer. Stock market plan values will rise and fall with the market, so build a cash fund you can draw on to avoid having to cash in at low prices.

Compare our unit trust best buy recommendations here

The best savings plans
The features you want in a school fee savings plan are low charges, flexibility and high returns. The first two are easy. Go for regular savings plans run by investment trusts. Annual charges will be under 1% and you can vary monthly payments, take out lump sums, etc whenever you like.

Almost all investment trusts have monthly plans and the Association of Investment Companies database contains information about its member companies' schemes. Big groups offering a wide choice of trusts like Foreign & Colonial, Alliance, Henderson and Baillie Gifford enable you to spread your savings across more than one trust (the typical monthly minimum is £25 per trust).

http://www.theaic.co.uk/Default.asp

High returns depend primarily on the performance of the market(s) you invest in and secondarily on the manager's skills. In the 1980s and 1990s, investors got annual returns of between 10% and 15% on investment trust savings schemes, and while you should not plan on that basis, such returns are possible.

Use our Model Portfolios to create an investment plan

Choosing markets If you don't feel you can or want to choose where to invest, then let the managers do it for you, with a large internationally investing fund. Foreign & Colonial, Alliance, Henderson and others have funds of this type.

But to obtain really high returns, consider putting some of your savings into riskier but higher-growth areas like Asia Pacific, China, India or in a spread of emerging markets with Templeton Emerging Markets Investment Trust.

Order free information on child savings plans here

A savings strategy
Here's a way of taking away some of the anxiety about a stock market savings programme.

Start by setting up a high interest deposit account, an investment trust savings plan and a fund supermarket account. The supermarket account will enable you to invest in lower-risk funds, so essentially this plan involves switching money between three levels of risk/return.

By the time your child goes to school, aim to have at least two terms' fees at all times in the cash account. Switch money to it from one or both of your other schemes.

Compare our unit trust best buy recommendations here

Switch away from risky investments the closer you get
Until five years before you start to pay fees, keep all your savings in the investment trust schemes. At that point, switch some into a Cautious Managed fund within the fund supermarket.

http://www.everyinvestor.co.uk/investing/funds/best-buys/cautious-managed/

These funds have 40-60% of their money in fixed interest investments, so they are less risky than share-only funds such as investment trusts. See our latest review of these funds.

http://www.everyinvestor.co.uk/investing/markets-are-booming%E2%80%A6-let%E2%80%99s-all-worry/e/158-1059

About a year before fees start, begin to move money into the cash deposit. How much you switch and when is a bit harder to plan, but follow these guidelines. Use this calculator to work out what your plan will be worth if you get a return of 7.5% a year (don't forget to revise this calculation when you alter the amount you're paying in).

http://www.e-gismos.com/savings.asp

When you review your plan each year, compare the actual plan value with what you expected. If the plan value is lower or about the same, do nothing. If it is far higher, move some money from the investment trust to either the Cautious Managed fund or the cash deposit or both.

Use our Model Portfolios to create an investment plan

The right pitch for Gran… Don't be shy about asking for help from grandparents. Put it to them like this: If you put money into their Child Trust Fund, they might take it out and blow it all at age 18. Help us with the school fees instead and you can be sure you're helping to set them up for life.

£50 per month buys one term's fees after five years, and a year's worth of fees after 10 years. And they can give lump sums up to £3,000 each year exempt from inheritance tax.

Article produced by EveryInvestor.co.uk