Ask the Expert: How should we save for our children’s university education?
Carl Lamb, managing director of Almary Green - Credit: Archant
I've been reading this week about how expensive it is in England to send children to university and I'm really worried about the amount of debt that our two children could get into by the time they get degrees.
They're quite young at the moment – we have a daughter aged 12 and a son aged 10 – so we'd like to build up savings for them so they don't have to take out student loans and our parents have also said they'd like to contribute to the university fund pot.
However, interest rates are so rubbish at the moment, I'm worried that what we put aside won't be enough in the end.
What sort of savings plan do you think we should consider?
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Response from Carl Lamb of Almary Green
The first point to make is that student loans are actually quite an efficient way to pay for university tuition and living costs.
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The repayments only start when the graduate's income reaches a certain threshold (currently £21,000, and going up to £25,000 in April 2018) and are limited to 9% of the graduate's earnings over the threshold – so if you earned £22,000 in 2017/18 you would repay £90 in that year.
Interest is charged on the loan but, importantly, if it's not paid off after 30 years, the outstanding debt is written off.
That's not to say there aren't good reasons to start saving for your children's future now: they could well need your help with their first home, for example, if you opt to use student loans to cover university costs.
You are right that interest rates for savings in banks and building societies are struggling to keep pace with inflation and may not deliver the returns you want so you may wish to consider investments rather than (or as well as) cash savings.
Both savings and investments can be managed through an ISA, if you are not using your annual ISA allowance elsewhere.
Over the longer term, a diversified investment portfolio should deliver growth but this can't be guaranteed. If you are happy to look at the investment route, it is important to get advice so that you understand investment risk.
Different types of investment have different levels of risk and the critical thing for you to ensure is that your investment portfolio is aligned with your risk profile. Making sure that your strategy is tax-efficient is important too.
Your parents could use their annual gift allowances to add to the pot for your children's future needs – or they could perhaps build up a separate savings or investment pot themselves, if they prefer to keep control of the money until it is needed.
However, if their estates are likely to exceed the IHT exempt band, then it may make more sense to pass money over to you on an ongoing basis through annual gifts.
