Start saving early to meet future degree costs - Bestinvest

Sixth form students in England, Wales and Northern Ireland are today finding out their A-level results and whether they've secured the required grades to take up offers for degree courses. This year it takes place against the backdrop of the coronavirus pandemic, which has had a hugely disruptive impact on their education and with A-level grades determined by teacher assessment rather than examinations.

Getting into first choices universities and the most competitive courses is demanding at the best of times, but with some of last year’s school leavers having deferred places and a recurrence of the grade inflation seen last year, the scramble for top university places is likely to be particular demanding.

Degree courses remain popular with school leavers despite the escalating costs of higher education since the removal of maintenance allowances in 2010. Participation in higher education has soared from 8.4% of school leavers in 1970 to 42.9% last year (with an additional 23.6% going into further education).

Yet a degree comes with a hefty price tag, with annual tuition fees of up to £9,250 a year for students in England, plus the costs of accommodation, living expenses and books on top. While many undergraduates will seek to mitigate these costs through part-time or out of term employment and parental help, it is estimated that the average debt of borrowers who finished their course in 2020 was circa £45,0001.

The prospect of beginning adult life with a significant debt hanging on their shoulders can understandably seem daunting, especially at a time when unemployment rates have risen for recent graduates.

Jason Hollands, Managing Director at Bestinvest, the online investment service said: “University can be an incredibly rewarding experience, pave the way to improved career opportunities across a wide range of professions and, of course, be great fun. But the sheer numbers of degrees being churned out inevitably means that a degree no longer carries the same rarity value as it once did. With many UK graduates ending up in non-graduate roles, a degree is certainly not a guaranteed meal ticket to career success and may have a knock-on impact, delaying the point at which a young adult might be in a position to get a foot on the property ladder, start a family or indeed, begin saving for the eventual, and considerable, cost of retirement.”

“Parents and grandparents who aspire for their children or grandchildren to eventually go on to university should take heed of this and plan well ahead to give them a head start in life. The key factor is to start saving as early as possible”.

Based on an assumption of achieving an average return of 5% each year Bestinvest estimates an investment of £144 a month for 18 years would be needed to generate approximately a pot of £50k to ease the costs of a three-year degree. Delay saving until the child is 13 years old, and the amount required to achieve £50k would rise to a formidable £736 a month, based on the same average annual return. Not only is that a much more demanding monthly amount, investing over shorter timescales carries much greater risk of being exposed to market downturn.

Junior ISAs – A way to kick start your children’s savings

Hollands added: “A simple way to start saving for your child or grandchild could be to invest in a Junior ISA. These are open to any child under the age of 18 who does not already hold a Child Trust Fund. Parents and guardians can invest up to a whopping £9,000 each tax year, with returns accruing free of tax and becoming accessible only when the child is 18, at which point the Junior ISA effectively converts into adult ISA. Investing into a Junior ISA can be done either through regular monthly savings or through lump sum investments into an account that can hold cash or investments.

“While most Junior ISAs depressingly end up in cash, ultra-low interest rates mean the real value will be eroded by inflation over time. To generate a decent pot over the longer-term, attention should be focused on investments. Global equity funds and trusts such as Scottish Mortgage, Fundsmith Equity, Lindsell Train Global Equity and F&C Investment Trust are popular choices within the Bestinvest Junior ISA.

“Some parents however are reticent about Junior ISAs, fearing their children might lack the maturity to take responsibility for a potentially sizable sum at age 18 and end up blowing their Junior ISA recklessly. For these parents, an alternative is to utilise their own adult ISA allowances, which are £20,000 per annum, and then dip into the funds as and when required to settle specific costs such as tuition fees or rent.”

The Bank of Gran and Grandad

“If grandparents wish to help their grandchildren get through the costs of a degree, making financial gifts to them can also help reduce a future inheritance liability. Money provided by parents for the education of their children is usually immediately outside of their estate for inheritance tax. Gifts from grandparents will only be potentially exempt if they survive for 7 years after making the gift unless they are covered by one of the inheritance tax exemptions. A total of £3,000 can be gifted to any person in a tax year and is immediately exempt. Alternatively, regular gifts from income that they do not use can be made and again are immediately exempt.

Recycling Junior ISAs into Lifetime ISAs

“When a child with a Junior ISA or Child Trust Fund reaches age 18, their account effectively converts into an adult ISA. A student could then dip into the account to help cushion the costs of their degree. But it is also possible to remain invested and hopefully see the investment continue to grow. This could be a better approach than fully cashing in the Junior ISA at the earliest opportunity.

“One shrewd strategy might be to make periodic withdrawals both for costs but also to reinvest some of the Junior ISA proceeds in a Lifetime ISA instead. This is a type of ISA specifically aimed at helping younger people address two of the key financial challenges in life: buying their first home and saving for retirement. People between 18 and 40 can invest up to £4,000 in a Lifetime ISA each tax year and receive a top-up from the government equivalent to 25% of their investment, worth a maximum of £1,000 a year. For a young person thinking about their future beyond university, this ‘free money’ can help them get on the property ladder early and in so doing reduce the time they might spend paying rent to someone else. But it is important to point out that Lifetime ISAs are less flexible than regular ISAs: if you make withdrawals before the age of 60, other than for the specific purpose of buying a first home, you will pay a 25% withdrawal charge.”

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