Affording University – Saving in Preparation
The controversy over the cost of university has recently centered on the rise in tuition fees, however the fact that the mechanics of the system mean that these costs (together with maintenance loan debts) will in practice only become payable when the student achieves a salary above a specified threshold, means that a financial strategy to negate the impact of tuition fees is a little trickier to define. The standard repayments might come so much later in life whilst making early capital repayments may well not be the most effective use of any pool of money.
However, you may still want to consider building a nest egg to avoid the debt built up by living costs, or to bridge the gap where loans, scholarships and grants may not. So what are the options available to a parent who is looking to provide financial support for their child when they embark on university life?
The Junior ISA (or JISA) will become available from 1 November 2011 for children who don’t have a Child Trust Fund and will initially have an overall contribution limit of 3,600 a year (rising with inflation). It will operate in much the same way as a conventional ISA with Cash & Stocks and Shares elements but the funds will not become available to the child until they turn 18. The JISA will also benefit from the same tax breaks (income, inheritance and capital gains tax) that conventional ISAs enjoy, however, the contributions made to a JISA will not affect the contribution limits of the parent’s own ISAs.
Child Trust Fund
The JISA is being introduced following the cessation of the outgoing Child Trust Funds (CTF) which have been closed to any children born after 2 January 2011 or who only began to receive child benefit after 3 January 2011. For those who do still qualify and have ongoing CTFs, contributions of up to 3,600 a year can continue until the child turns 18 and the funds will not be subject to Capital Gains Tax (CGT). In addition, the child can begin to manage their CTF when they turn 16 and switch the funds to an ISA if they wish. The funds only become accessible when they turn 18 however.
Child Savings Accounts
Alternatively you may want to consider opening a standard savings account for your child. Any adult can contribute to a child savings account and it will benefit from certain tax breaks. An account set up on behalf of a child will firstly be exempt from inheritance taxation should the person contributing to it die. Secondly the income it generates is exempt from income tax if:
a) the income across the parent’s annual contributions doesn’t exceed 100 per parent. This limit could potentially reach 400 where two step parents are involved and does not apply at all to grandparents, aunts/uncles, or friends for example.
b) the income on the account does not exceed 6,475 for the year.
In addition, there are a number of other savings options backed by the government which benefit from a tax free status and can be used to create that nest egg for your child, such as the National Savings and Investments’ (NS&I) Child Bonus Bonds and Index-Linked Savings Certificates, and Premium Bonds.
Whether or not you want to reduce the amount of debt you child is likely to accrue at university, or you are concerned that they may not be able to cover their living costs in the first place it is always worth being prudent and considering saving for your child’s future through a solution such as a Junior ISA.