Tuition fees and university accommodation don’t come cheap. We’ve got some tips for parents wanting to save to help their children with the costs.
Top tips to help you save for your children’s university fees
With tuition fees of up to £9,250 a year – not to mention accommodation costs on top of this – university doesn’t come cheap.
With many parents eager to build a nest egg to protect their children from huge debts once they leave higher education, we look at some savings options you have at your disposal to give your children a financial head start in life.
Even if your child is still very young, it’s worth thinking about the future now. Putting some cash aside as early as possible is the most efficient way to build up a healthy savings pot.
By planning ahead, you can achieve a sizeable lump sum by the time they head off to university.
Save as much as you can comfortably afford without sacrificing too much. After all, you need to have a life too.
Make the magic of compounding work for you
What is compounding? In a nutshell compounding is how your savings will grow faster the longer you leave them alone.
So, however you choose to save — whether it’s an interest bearing savings account or a stocks and shares ISA, the same principles of compounding apply to both.
To illustrate this – we’ve used a savings account example:
When you save you will earn interest on your original savings amount, which is added to your overall savings pot. Once this interest has been added, you start to earn interest on your original savings, plus the previously earned interest.
This is the basic concept behind compounding, which also applies to investments, when they benefit from growth in value.
Long-term savings options
As well as getting into the savings habit early, you also need to choose the right type of investment for your money.
If there are several years to go before you need to cover education costs, and you’re willing to take on some risk, you might want to consider investing in the stock market rather than putting your money in a cash savings account. Using up your ISA entitlement is a good place to start.
- Stocks and shares ISAs allow you to invest without paying income tax and capital gains tax on returns. For the current tax year, you can put up to £20,000 in an ISA.
If you save into your own ISA account rather than one on behalf of your child, you will be able to retain control of the money and how you use it.
- Junior ISAs allow you to save and invest on behalf of your child until they turn 18, the limit is £4,260 for the 2018/2019 tax year.
Money invested in a Junior ISA belongs to the child and at 18 automatically rolls up into an adult ISA, when they will be free to use the money as they want.
Short-term savings options
If you have fewer than five years to save and don’t want to take any risks, you should probably consider interest bearing cash based products for savings.
- Children’s savings accounts can be an effective way to build a nest egg. If you open a regular saver account, you can put away a certain amount on behalf of your child each month.
These types of products often have preferential interest rates for children, although withdrawals may be limited.
Alternatively, you can put money into an easy access children’s account instead. You have more freedom over deposits and withdrawals, but the interest rate is unlikely to be as attractive as a regular saver.
- Fixed-rate savings bonds enable you to lock your money away for a fixed period, usually between one and five years, in return for a guaranteed interest rate. While specific children’s savings bonds are no longer available, you can still save through ordinary bonds.
The longer you tie up your money, the better returns you get. Bear in mind that if you do opt for a longer-term bond and then interest rates rise, you may be stuck with an account that isn’t as attractive as when you opened it.
It is important to remember that although investments offer the potential for higher returns over the longer term, the value of your investment may fall as well as rise, is not guaranteed and may be worth less than the amount invested.
Although there is no fixed term you should consider ISA investments to be medium to long term ideally five years or more.
The tax efficiency of ISAs is based on current rules. The current tax situation may not be maintained. The benefit of the tax treatment depends on individual circumstances.