19th August 2016
Darius McDermott, managing director, Chelsea Financial Services looks at strategies for helping your children with university expenses.
As A-level students around the country received their final results this week and got ready to (hopefully!) head off to their chosen university, it’s slightly sobering to consider many of them will have debts of £44,0001 when they leave those institutions in three years’ time.
My kids are a way off this stage but, when they do eventually get there, I’d like to be able to give them a bit of a head start. So my wife and I have started saving early. One of the best ways to do this is to set up a Junior ISA for each of your children. I know I’m hardly the first person to make this point, but with a long-term time frame, small monthly contributions will really add up.
Importantly, while many people will tell you about the benefits of opening an account for your precious newborn when you’re basically on your way home from the hospital, I’d really stress that it’s not too late to start a few years down the track. Sure, you might not be able to take care of their university fees completely, but you could make a pretty decent contribution.
Let’s take a look at this example. If you began saving into a cash account when your child was five years old and put in, say, £50 a month over 13 years until their 18th birthday, you’d have £7,800 (assuming an interest rate of 0%).
While no 18-year-old I know is going to turn their nose up at that sort of sum, you could potentially boost it quite significantly by investing instead. This is where the Junior ISA comes in, providing a tax efficient wrapper through which you can buy shares, bonds or funds on your child’s behalf, up to a maximum amount of £4,080 per year.
We all know the interest rate on savings right now is pretty woeful. And the Bank of England just gave us yet more incentive to invest when it cut our official rate to 0.25% earlier this month. It has signalled it could go lower still as the aftermath of Brexit continues.
A UK equity fund, on the other hand, might return around 6.7% a year, based on average fund returns over the past 20 years2. While past performance is no guarantee of future returns, if you were to hypothetically apply this rate to contributions of £50 a month over a 13-year period, this would give you £12,4593. Even if you estimated annual returns at a more conservative rate of 5%, you could still have increased your savings to £11,0004.
For this type of investment, I’d go with a solid, core holding such as the Elite Rated Liontrust Macro UK Growth, which has an emphasis on capital growth and buys mainly large and medium-sized UK companies. The Elite Rated Investec UK Alpha is another good core fund, whose manager Simon Brazier has a consistent track record and a strong team behind him.
Of course, you may want to diversify and hold a couple of different funds in your Junior ISA to take advantage of periods of strength in different markets. You can easily split a £50 monthly contribution between three funds.
Other sectors to consider could include a European or a US equities fund. I particularly like the Elite Rated Jupiter European, which has a history of performing well in different macroeconomic environments. Its manager, Alexander Darwall, has been running the portfolio since 2001 and has turned it into a top European fund. In the US, I prefer funds that focus on medium-sized companies at the moment, where I think there are better growth opportunities. The Elite Rated Schroder US Mid Cap fits the bill and its manager, Jenny Jones, is based in America, facilitating in-depth company research that has led to excellent stock selection.
One thing to keep in mind with Junior ISAs is that once your child turns 18, the account automatically passes into their control and they can immediately access the money for any purpose they like. You might intend for them to pay off their university fees, but they may well have other ideas! One suggestion I quite like, which may encourage your teenagers to spend the large lump sum responsibly, is to get them to also start contributing a small amount to the account each month during secondary school. This has the double benefit of a) boosting their savings even further and b) getting them engaged with investing from an early age.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’ views are his own and do not constitute financial advice.
1The Sutton Trust, Degrees of debt, April 2016 – £44,000 is the “typical English student debt”, according to the research
2IA UK All Companies, TR in GBP, 15/08/1996–15/08/2016, accessed 15/08/2016
3The Calculator Site, Compound Interest Calculator. 6.7% annual interest rate, 13 years, £50 monthly deposit, compounding monthly
4The Calculator Site, Compound Interest Calculator. 5% annual interest rate, 13 years, £50 monthly deposit, compounding monthly