Continuing the theme of future financial provision for children, it has to be said that very few of us are likely to have sufficient liquidity to meet significant expenditure needs such as the cost of further education or the cost of a deposit for a home or assistance with its purchase.
Much has been written about the cost of further education but it is worth bearing in mind that this is usually the smallest part of the equation – the cost of living is far more expensive, especially if, as is the case with my sons, this includes the cost of a season ticket at Highbury and travel to home and away matches.
A recent survey showed that the cost of attending university will amount to not far short of £8,000 and all that out of after-tax income.
Moving away from education, with the cost of a relatively inextravagant flat in the London suburbs being around £150,000, a deposit of £15,000 would be the minimum one should think of. Try saving for that out of the salary you receive in your first job, while repaying your student loan and actually enjoying yourself a bit. It will not be easy. So, education and property purchase are just two reasons for a caring parent to start saving early.
When you are considering advance funding for the benefit of your child, it will often be necessary for your anxieties to be awakened before you actually start the necessary programme of saving. The difficulty in practice may well be that, at just the time your anxieties are stirred, you are probably already committed to increased expenditure by the fact of actually having a child. This may be particularly acutely felt if the child is your first and your spouse has given up work. You may also have increased your borrowing for the extra bedroom, people carrier or both.
All in all, we have to accept that advisers will have a potentially difficult job creating sufficient anxiety in the minds of their clients to take action. The good news for advisers, though, is that most people love their children. OK, I know there are times when the opposite would seem to be true but, generally, love is the norm. We all know that it can conquer all and lift us up where we belong – if not to where the eagles fly, then maybe to the right university and then the right property.
It is also helpful that the facts connected with potential financial expenditure are irrefutable at the moment. Advisers should be asking potential buyers of financial services to imagine what it would be like to be unable to help their children to buy a property or, perhaps worse, cope with the costs of further education. It is estimated that most students leave university with debts approaching £10,000, which can eat up up to £200 a month out of their pay cheques.
The earlier one starts saving, the better the chances of achieving one's goals. There is also the fact that, when saving for an important future targeted sum, most savers will not want to take the risk of failing to accumulate the necessary amount, especially in the current climate when Keynesian “animal spirits” are depressingly low when it comes to investment.
However, provided that sufficient “fearful or aspirational” and justifiable anxiety can be created, the next step will be to determine the most suitable investment portfolios and product wrappers to deliver the objectives for the individual.
For those who aspire to do business in this market, there are virtually no restrictions on the wrappers that could be suitable to deliver effective savings for the future financial needs of children. As for the most appropriate portfolio for an investor, it will be necessary, as always, to take into account attitude to risk and the timescales involved. Against this background, asset allocation diversification and correlation techniques will all, no doubt, be used to make the choice.
In this respect, it is amazing how unnecessarily complex this market is made. Sandler has just picked up on some of the product wrapper complexities that abound and concludes that many of them are tax-driven. That is by the by. In the context of education planning, I suspect that some of the confusion comes from the misplaced belief that there is something special and legally difficult about funding for education. Some of this perception may have come from a time when schemes based on charitable trusts and composition arrangements were more prevalent.
There is also a significant amount of misunderstanding regarding the legal status of children in respect of contracting for financial services products. In some cases, this may have missed the point since the target market for children's savings is rarely the children themselves. More usually, parents, grandparents and other benefactors will be the targets. In this case, the legal status of the child is irrelevant.
There will be some cases where the child has their own money, perhaps through an inheritance. In this case, it is important to bear in mind the fundamentals of contracting with children. Broadly speaking, only contracts for “necessaries” are legally enforceable. Despite this general rule, there are some exceptions in connection with life insurance and some special rules in connection with plans on the lives of children effected with friendly societies which I will look into later.