Investment trusts offer smart solution for university costs

For thousands of families celebrating A Level results in recent days, the preparations for university are now beginning in earnest. In particular, students, parents and other family members will be trying to plot out the finances of university life. And with data from the Student Loans Company suggesting that the average student starting a course in the coming academic year will graduate with around £43,000 of debt, that task has never felt more important.

In fact, it is never too early to start planning for the cost of higher education. Parents with younger children don’t know what choices their future 18-year-olds will make, but the laws of compound interest mean money saved earlier will work harder. And your money doesn’t have to be used for higher education if your children eventually decide on a different direction.

How, though, to save most effectively? After all, we’re talking about potentially sizeable sums. Tuition fees alone currently stand at £9,250 a year for most courses and universities are pushing the government to allow them to raise fees in order to address financial pressures.

Traditionally, the most common answer to this question has been a bank or building society savings account, into which parents deposit regular sums. And despite the low interest rates of recent years, cash is still a very popular option for parents saving on behalf of children. Data from HM Revenue & Customs suggests the number of families opening Junior Isas – the tax-free savings vehicles for kids – has increased more than 10-fold over the past decade, but that more than two-thirds of those accounts are invested in cash.

That’s potentially a missed opportunity given the long-term trend for stock market investments to outperform cash. Indeed, a study published a couple of years back by the Centre for Economics and Business Research found that parents who had saved the maximum each year in cash-based Junior Isas over the first decade of the scheme missed out on £32,300 compared to those who used the accounts to invest on the stock market.

Families often worry about the ups and downs of the stock market. However, assuming you start saving when your child is born, it will be at least 18 years until the money is accessed; there has been no period in the past two centuries in which an investment in the stock market has not outperformed money parked in cash over such a lengthy period. With interest rates currently falling once more, cash has even less chance of delivering substantial returns.

This is one reason why investment trusts have long been a popular option with parents saving on behalf of their children. They offer professionally managed and well diversified exposure to the stock market and the superior returns it tends to deliver over longer time periods.

Investment trusts themselves have long understood their role in this regard. In the past, many offered regular savings schemes that enabled parents to drip-feed relatively small sums into their funds each month – often as little as £50. These schemes are now available from investment platforms rather than investment trusts themselves, but they remain as compelling as ever.

Indeed, over time, regular savings mount up very quickly. A £50 monthly investment in the average investment trust over the past 18 years would today be worth around £31,000. Research carried out by the AIC earlier this year found 71% of parents intend to help children with university costs, so an investment trust pot of cash could prove hugely valuable.

Such large sums could make a huge difference to any child turning 18 – whether to cover some or all the cost of university, or to provide them with a start in life such as the beginning of a deposit on their own home. These savings schemes can be set up tax efficiently using a simple trust structure, and they’re straightforward to run and to eventually hand over to the child.

For most parents, regular savings in an investment trust therefore offers a much better option than cash. It may be that before your child reaches age 18, you begin shifting the savings into less volatile assets, rather than risk becoming the victim of a correction from which there is little time to recover. That’s fine, but don’t miss out altogether on the superior returns available in assets other than cash.