Begin planning now for your children's university careers

Published on Friday 3 July 2009 20:27

Q OUR eldest child is going to university in September and I'm very aware of the cost implications. We also have two other children, aged 11 and 13, and I would like them to have the same opportunity, but I think we need to start planning now. My husband and I earn a combined salary of £100,000 and have private pension funds and some savings. How should we best invest to support the younger children through further education? KT Livingston

A It will depend on a number of different factors but if we assume a sensible average figure of 10,000 a year or 40,000 over the course of a four-year degree, you would need to start saving approximately 400 a month now for the 11-year old, and require an average return of 7 per cent (before charges) through to age 18. For the older child on the same basis it would be nearly 600 a month over the next five years.

In the current climate it is important to minimise the effect of taxation on investments. You have not mentioned if you have an Isa. If not, it would be sensible for both of you to make use of this allowance (currently 7,200 and increasing to 10,200 if you are 50 or older).

The main benefit of Isas is that they are free of capital gains tax and income generated does not need to be entered on your tax return. You can invest into shares and/or cash.

If you use up your Isa allowance each year then you could employ the same investment strategy and still hopefully minimise taxation due to the fact that everyone has an annual capital gains tax (CGT) allowance of 10,100. This means that any investment gains need to be in excess of 10,100 before you are liable to tax, which would be levied at 18 per cent.

Alternatively, there are many "saving for children" plans available, which can sometimes be in the form of a trust. In Scotland, if a bare trust is used the child has a right to the capital at age 16, not 18 as is the case in England. So it may be more appropriate to have the investment in your name if you want to retain control up to the age of 18. When trusts are involved it is essential to seek expert professional legal advice.

Your pension could be another potential source of funding, depending on your overall financial position and need for income in retirement. Once you reach 50 (55 from next April) you can take up to 25 per cent of your pension tax free. However this does impact the remaining income you receive and taking pension benefits early is not suitable in most circumstances.

Finally, some advisers are looking towards offshore life assurance bonds as potential savings vehicles. Here the investment can be owned by the parent and held in an offshore bond which results in tax-free (with the exclusion of withholding taxes) growth whilst within the bond structure. In the future the investment could be assigned to a child at an appropriate point. Should the investment be encashed at that stage the chargeable gain is dependent on the child's income at that time, which is likely to be negligible compared to the parent.

A suitably qualified financial adviser can help put a plan in place for you which minimises taxation and charges and monitors the performance in terms of your objectives.

&#149 Gregor Munro is a financial adviser at HBJ Gateley Wareing. If you have a question you need answered, write to Jeff Salway, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [e-mail]. This above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and HBJ Gateley Wareing accept no liability on the basis of this article.