School holidays are already nearly half over, and parents will soon be checking depleted bank balances not only to work out how to pay for books and school uniforms, but for the inevitable first-term fees for those children going to private primary and secondary schools.
There are two types of parents paying school fees: those who have sufficient cash flow to meet the fee demands every term and those who need to save, or borrow to pay the bills. Even if you fall into the former category, you would still be making better use of your surplus income if you invested some of it long term. Ideally, you need to start saving/investing for your children's education when they are very young and many parents begin by putting their monthly children's allowance into bank, building society, or An Post savings accounts; with the allowance having been raised to £30 a month, it can now also qualify for a National Instalment Savings Scheme, into which a minimum of £30 (maximum £300) a month is saved for 12 months, after which interest of 30 per cent begins to accrue for the next five years. This is the equivalent of an annual compound interest rate of 4.9 per cent.
The relatively low interest rates being paid by even the best yielding deposit accounts is not going to be sufficient to meet most private school costs running at about £2,000 a year, especially if you only began saving when your child was already near school-going age.
Instead, many parents must resort to equity-type investments in which regular monthly or lump sum contributions buy investment units in a managed or specialist fund, the value of which then reflects the performance of the underlying assets.
The most popular are managed funds in which there are a spread of assets shares, government stocks, cash and some property, though most are heavily weighted in blue-chip company shares.
In recent years, these mainly life-assurance based funds have undergone a serious face-lift, with the lowering of initial charges, more flexible payment schedules that can be interrupted without penalty and better early year surrender values. PIPs and PEPs (personal investment and equity plans), which require committing yourself to saving between £50 and £100 a month, are the most popular and tend to give the best returns for savings periods of 10 years or less. Go over that number of years and their higher-than-average annual management charges begin to eat proportionately more of the fund than the older-style, front-loaded contracts, which were designed for longer savings periods of about 20 years.
Lump sum savings can be very cost efficient, but many unit-linked or with-profit investment bonds, as well as tracker bonds, require minimum amounts of between £2,000 and £5,000. It is a good idea to consider putting part of an inheritance, a surplus from the sale of a property, even an annual commission from work into such a single premium contract, though most require a minimum five-year saving period. Your capital could be at risk if you encash any sooner. An Post three-year Savings Bonds are absolutely secure, but only pay a 12 per cent return, or 3.85 per cent CAR.
For parents who are going to need to draw down their funds over the shorter period, there is another solution. Commonly known as mortgage payment acceleration, this "saving" method is a sure-fire way to get an average 7 to 8 per cent return on your money, which can then be drawn down when you need it.
Very simply, you arrange with your lender to pay an additional amount each month off your mortgage, say another £50 a month. The effect is to slowly but surely increase the amount of capital you own in your property, thus avoiding long-term interest payments. If you still have, say, 15 or 16 years left on your mortgage owning those extra slices of capital will have a huge effect on the total interest bill since mortgage interest rates are compounded over 20 years. A 7 or 8 per cent return is at least 3 per cent more than the best deposit accounts are offering and more than double the inflation rate.
When the time comes to pay school fees, the additional accumulated mortgage payments can be drawn down as needed it is your money after all. All the lender requires is that you pay the agreed monthly interest and capital payment. The accumulated monthly amount may or may not be sufficient to meet all the fees, but it will help lessen the burden.
The impact of accelerating a mortgage payment is so significant that even if you draw down funds in the short-term for school fees, you may find that you will still pay off the loan at the agreed maturity date. Another bonus is that if your children do not end up going to a private school, you will have knocked several years off the term of the loan.
A number of the main lenders, Bank of Ireland and First National Building Society being among the first, have created flexible loan accounts which can be used to help pay short-term requirements like school fees. But the other lenders will all set up such repayment programmes if you so wish.
