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Higher Hopes

I have recently been promoted to marketing manager for a big website design company.

I am married with two children aged eight and six. My wife works part-time for a small local business that employs 10 other full-time staff.

We are both in our mid-30s and our mortgage is on a repayment basis with separate life cover. The company I work for has a flexible benefits scheme. I have chosen to maximise my pension and death-in-service cover as well as choosing private medical provision for the family. My employer also offers share incentives that I have taken up.

Our main concern is to help fund the children&#39s higher education. I believe this will be a big financial burden in the future. How can we best provide for this anticipated cost?

The concern raised is based on the supposition that good-quality higher education is going to be even more necessary in the future than currently and that this is likely to be more expensive in real terms than now.

Your children will need to attain the knowledge-based skills that are predicted to be required over the next 10 to 20 years. The most expensive element in respect of this provision will be when both children are attending higher-edu-cation institutions at the same time. However, it is uncertain what the funding arrangements will be at the time the education will be required.

The total resources available, after taking account of your promotion, leave a reasonable surplus to create a meaningful financial plan.

You and your wife appear to be catered for in respect of protection apart from extra life cover for your wife on the basis that additional resources will be required to pay for child care if you are to retain your job in the event of yourwife&#39s death. This protection could be arranged at low cost on a term basis, probably convertible term insurance to provide additional options at a later date.

On the introduction of stakeholder next April, your wife will be able to make regular contributions to a contract to provide some inde-pendent pension provision for herself on a tax-advantaged basis. This would supplement any state pension that may exist in the future along with your pension or, alternatively, the death-in-service benefits. Stakeholder-friendly contracts are now available, so your wife&#39s pension could be arranged at a relatively low regular cost.

Having put in place the main protection and pension arrangements to secure you financially, the main object of school fees can be addressed. There is no magic about planning for higher education. It is simply a financial objective that can be viewed as school fees planning. It is, however, one of the most expensive commitments that parents can make.

It may not be possible to cover the full costs of any type of educational cost in the future and this expectation needs to be taken into account. However, the decisions made now can subsidise that cost and substantially reduce the future financial burden on the family.

Assuming that the provision will be financed out of income, one approach could be to use a combination of qualifying with-profits or unitised with-profits endowment policies over 10 or more years, alongside equity growth Isas.

The advantage of this solution is that, based on a balanced approach to invest-ment, the Isa provides direct tax-sheltered equity exposure on a managed basis, while the endowment element provides smoothed returns over the medium to longer term and balances the risk by use of a more cautious investment.

It is generally accepted that with-profits returns over the medium term have traditionally outperformed fixed-interest deposits or securities. There is no reason to suppose this will not continue.

Although endowments in respect of mortgage planning have received a bad press, the with-profits concept – and endowment products, in particular – still have a use.

The main criteria in choosing an appropriate product should be based on a rigorous review of the financial strength of the provider. One key test is the proportion of equity to fixed interest and other investments such as property in the with-profits fund. Provided the equity content is near the 70 to 80 per cent range, this indicates the company is financially very strong.

The charging structure is also important in choosing a suitable contract and it is recommended that only those contracts that do not have up-front charges are used.

The endowment plan also carries an element of life insurance. This would provide a capital sum on first death to use or invest for the purpose intended. This cover is additional to the requirements already identified.

Waiver of premium and premium indexation are two other key options available within an endowment contract to match the main objective.

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