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School daze

I would like to send my children to private school. Have you any suggestions on how I can calculate how much money I will need and give me some ideas as to how I should fund the fees?

My advice is to research your local schools and see what they currently charge for different age groups. Then ask what their history of fee increases has been. Remember that school fees generally rise at a much higher level than inflation as measured by the retail prices index because they are linked mainly to staff costs.

The Independent Schools Council (www.isc.co.uk) estimates that fee increases for its schools in 2007/08 averaged 6.2 per cent. This could quite easily be higher for 2008/09. Think how much your energy and food prices have risen of late. Schools are likely to be suffering a similar increase in such costs.

Statistics from the ISC suggest that the average fee per term at an ISC school for 2007/08 was £3,751. This rises to £7,353 for a boarding school.

There are therefore huge variations in fees depending on the type of school, the location of the school and what age your child will start school.

Remember that you may also need to fund your children’s university education and should factor in an assumption of that cost.

The cost of schooling does not stop at the fees. Build in a contingency for uniform, sports kit, transport, school trips, lunches and so on.

Ask the school if it will accept payment up front for the year. You may find that it pays to accept its discount.

Certain schools are prepared to accept fee payments in advance for a child who will not be attending for many years. This has the advantage that you can lock into the cost today rather than risk above-inflation increases. However, clearly there is a risk that you will not eventually choose to send your child to that school.

There is definitely no one-size-fits-all solution to school fees planning and I would tend to avoid any investment products marketed specifically as school fees savings plans, particularly as these can be quite expensive.

The trick is to treat school fees’ expenditure like any other regular commitment. That way you can focus on making your entire finances as efficient as possible, rather than take a blinkered view. This goes for all aspects of personal finance, really. Make a coherent plan for the bigger picture, rather than lots of separate plans. Make sure that any investments you use are as tax-efficient as possible. Use Isa allowances on a regular basis. If you have savings accounts, make sure that they are in the name of the lower taxpayer to maximise your net return. Invest in National Savings & Investments’ index-linked savings certificates, particularly if you are a higher-rate taxpayer. Reduce the cost of investment by investing in index-tracking funds.

Make use of your capital gains tax allowances if you are able to.

Consider switching to an offset mortgage although not necessarily in the current climate. That way, you can draw down on the equity in your home if you have a lean year and then make overpayments if you have excess income.

If you have a big pension fund, you might take the view that you can increase your mortgage debt to pay school fees in the knowledge that your pension tax-free cash will be there to pay off the outstanding loan.

If you are a higher-rate taxpayer, imagine getting higher-rate tax relief on all your pension contributions, 25 per cent tax-free cash at retirement to pay off your mortgage and then an income from the rest of the pension fund that you deliberately keep under the higher-rate threshold to just pay basic-rate tax. That is a powerful combination.

What is quite difficult in practice is to work out the combined effect of all these ideas. Not all will be applicable in your case but it is possible to model different scenarios using financial cashflow analysis packages.

You can use assumptions for inflation, interest rates, investment returns, income, expenditure, retirement age and so on to model how your financial position will evolve. It is useful to visualise not only the longer-term picture but also the year-on-year cash in, cash out position and what effect changes in your assumptions would make to this.

The best solution is likely to be a combination of measures and will need to be reviewed regularly, particularly when your circumstances change.

Jason Witcombe is director of Evolve Financial Planning

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