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Saving for the next generation

8 September 2017

David Prosser explores how saving with investment companies can make a huge dent in university costs.

As students prepare to head off to university, the debate over tuition fees continues to rage. While Labour’s pre-election promise to abolish fees was stymied by the party’s defeat at the polls, its proposals did kickstart a fresh debate over the cost of university; so much so that the funding system in its current form looks almost certain to be reformed.

That will be welcomed by many students and their families given the large debts so many young people are now racking up. The Institute of Fiscal Studies reckons the average student starting university this year will leave with as much as £50,000 of debt.

No escaping university costs

It would be a mistake, however, to think that the students of the future will not face many of the same pressures as today’s generation. While it’s possible the burden of tuition fees will be reduced in the future, students are likely to have to contribute something to the cost of their university education; add in living costs, including rising rents, and a college education will still be costly.

The AIC’s research suggests around two-thirds of parents intend to help their children out with university costs; most will do so by drawing on savings. How, though, will they build up those savings in order to be able to offer as much help as possible?

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 published by HM Revenue & Customs in August showed that while there was a dramatic fall in the number of people saving via cash individual savings accounts (Isas) last year, the number of people opening junior Isas – the version of the tax-free account aimed at children – rose by more than 10 per cent.

Shares outperform cash

However, parents using cash accounts to save for their children’s future are almost certainly missing a trick. 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 at rock bottom, cash has even less chance of delivering substantial returns.

This is one reason why investment companies have long been a popular option with parents saving on behalf of their children. They offer a professionally-managed exposure to the stock market and the superior returns it tends to deliver over longer time periods. Investment companies themselves understand their role in this regard: many offer regular savings schemes that enable parents to drip-feed relatively small sums into their funds each month – often as little as £25.

Small sums add up

Over time, these regular savings mount up very quickly. A £25 monthly investment in the average investment company over 18 years to 31 July would have ended up worth around £16,260; if you’d managed to find £50 a month, the investment would have grown to £32,500; and those able to invest £100 a month would now be sitting on just over £65,000.

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

For most parents, investment company savings schemes therefore offer a much better option than cash. It may be that you don’t want to wait until your child reaches age 18 to begin shifting the savings into less risky 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.

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