How to plan for a good education

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When is there ever such a thing as a free lunch? While numerous Scottish Government policies might suggest so, signs also point to an impending reality check for the flagship policy of free university tuition for home students.

A few weeks ago in The Scotsman, Sir Paul Grice, Principal of Queen Margaret University, called for a change of mindset. “It’s not really free… somebody has to pay for it,” he said, pointing to the shortfall in the government grant that pays for the policy. It has not kept pace with inflation and, indeed, suffered a £28.5 million cut this year.

So who does pay for it? Scottish universities have been making up the difference between government funding and actual costs with the revenue from fees levied on international students. Home students feel the consequences of this through increased competition amongst themselves for fewer places on the best courses. That’s paying for it.

Even so, the future isn’t looking rosy – International student numbers, however, have fallen dramatically by 20 per cent this year in part because of new UK visa rules, creating a shortfall of over £100m in the sector. It’s a sticky political situation. Grice, hugely reasonable and optimistic in the face of this, is calling for a commission to help find a “fair and affordable” solution, one that keeps standards high but doesn’t create barriers to access.

In short, somebody will have to pay for it. If you’re a taxpayer, you are already helping out. If you’re a student, you may take on debt. If you’re a parent you may choose to help your children with their university fees or living costs, wherever they go to university.

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For us at Calton, education planning for school and university has become a key element of the service we offer our clients. We talk about their needs and wishes for their children and, through cashflow modelling, we work out what is realistically possible within their risk parameters. For grandparents, education planning can be an efficient, positively directed method of generational wealth transfer.

The key thing we can assist with is looking at how to fund education costs holistically, across generations. This allows us to determine the most tax-efficient and secure way of providing for future education needs.

Often an appropriate solution can be found by utilising parents’ ISA and CGT allowances, or by advising grandparents to set up trusts to allow the tax-efficient encashment of investments in children’s names.

Throughout our advice we have to be cautious about tax traps such as the parental settlement rules, capital gains tax rules on disposals to connected persons (the “clogged losses” rule), and the high-income child benefit charge. And of course, underpinning any education funding strategy must be appropriate insurance to ensure that, should the parent or grandparent become ill or die, the child’s education is not interrupted due to a lack of financial resources.

The current political hullaballoo about the introduction of 20 per cent VAT on private school fees by a potential Labour government presents a more immediate and pressing financial challenge for some parents. UK-wide, only 6-7 per cent of children are in private education, so this will not affect as many families as high-profile scaremongering suggests. In Edinburgh, however, the percentage is far higher, closer to 30 per cent, so the squeeze will be particularly acute in certain postcodes.

How much revenue this policy will raise for the Treasury and how it will play out is uncertain. Some parents will be fortunate enough to be able to afford the increase from earned income. Others will tighten their belts and grit their teeth, perhaps reducing pension contributions while paying the increased fees, or cashing in any small funds that they may have. Grandparents may contribute through gifts from savings or pensions. This, of course, will have consequences in the medium to longer term, which individuals will need to consider.

Others still will decide that this is the final straw in the midst of a cost-of-living crisis, especially given that the Institute of Fiscal Studies reports a 20 per cent increase in real terms of average private school fees since 2010.

The time for cash-flow modelling is now, before any decisions are taken. By sitting down with an adviser, you can become informed of the short, medium and long-term consequences of having to pay more for education. How will this hike in fees look in the bigger context of your lives? Do you want to put aside money for university tuition or support? We can discuss with you whether you have enough, how to make what you have work for you. It’s a reality check, but one that can open your options rather than shut them down.

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