Once parents have completed the ‘State vs Private’ debate and decided on the Private route, their thoughts pretty quickly turn to how this ever increasing expense can be funded for their offspring.
In the expat community this is usually an expense that has been discussed and factored in prior to the move, or if you are lucky enough this is covered for a couple of years by your employer. Either way, sooner or later, you will have to find £20-30,000 per annum per child to cover the costs and this can be a tall order to provide out of normal salary. In fact careful planning is often more important for those that have the costs covered for the first few years, as cessation of this benefit can prove a nasty and expensive shock.
Even if you have gone the state route, or your fees are covered by your employer for the full duration, do not think that your worries are over, as University is looming on the horizon. Depending on where your children choose to study and your residency status could mean tuition fees of anything up to £50,000 per annum, plus living expenses.
So if you have children, the likelihood is that sooner or later you will get stung and this article hopes to give you a few ideas as to how to make that sting a little less painful.
There are two main methods to providing for future recurring expenses such as school fees, which are planning from a lump sum or regular savings.
If you are fortunate enough to have residual capital to invest then this may be invested and then drawn down as required once the fees become payable. The usual way of achieving this is via an offshore bond tax wrapper. This allows the monies to grow tax free whilst within the bond. There are a wide range of investment choices available, ranging from growth options during the build-up phase to income producing options once the fees become payable. These can also bridge the full range of risk profiles from bank deposits to individual equities.
The offshore bonds also have tax advantages when the monies are taken, as only the gains are taxable and in some countries, e.g. Switzerland all monies taken from an offshore bond are free of tax.
The other route is via regular savings plans that provide lump sums to pay the fees each year. This can be a less onerous route financially as the later years have longer to grow and payments are spread over more years.
These work as a series of plans into which the parent or grandparent contributes on a monthly, quarterly or annual basis. The plans are set up to mature in consecutive years to pay the School or University fees, allowing the plan to gradually build up a lump sum. This has the added advantage in that the contributions are on an ever decreasing basis, as once a plan matures then the contributions cease.
If we take an example of a 6 years old child whose school fees are £20,000 per annum starting in 5 year’s time and running through to age 18. Here we would have 8 separate plans with terms of 5 through 12 years. Each plan would have a guaranteed maturity of £20,000.
At age 11 the first plan would mature and provide £20,000 plus bonuses, which pay the first year’s fees. Contributions to this plan then cease. The next year the second plan matures with £20,000 plus bonuses and pays the second year’s fees and so on and so on until the final plan matures at age 18 and the final year’s fees are paid.
Each year a plan matures the overall contributions fall, also the later year plans will have smaller contributions than the initial years as they have longer to grow, which mean that once you are through the first few years then the hardest part is behind you.
These schemes have the added advantage in that as they are insurance based, if something happens to the premium payer, death or a critical illness, then the remaining premiums are paid by the insurance company and the plans continue.
Additionally, if something happens to your son or daughter and they become disabled, then the schemes pay out a disability income from their 16th birthday until age 65.
This admittedly will not take away the pain of paying the school fees, however with a bit of planning, we would hope that this can be reduced from screams of agony to a bit of a wince!
If you have any questions or would like to discuss the above further please attend the Spectrum seminar on 29th September 2016 at Chateau de Nyon, with further details to be provided nearer the event, or contact firstname.lastname@example.org for an initial discussion.