MONEY

Martyn and Sarah, both aged 36, live in Gloucestershire with their two children, Adam, aged eight, and Samantha, four. They want to provide for their children's university education and private school from the age of 11. Martyn and Sarah jointly earn pounds 75,000 a year. They have a variable mortgage of pounds 120,000 and pay pounds 7,000 a year for a nanny. Th ey believe they have up to pounds 1,000 a month to put away. What should they do? By Don Clark

There's a belief that saving for private education should start on the day the child is born. Because Martyn and Sarah have left it rather late to finance the children's private secondary education (at least for the eight-year-old Adam) it is not going to be possible for them to save sufficient money to pay all of the school fees in the short time they have left.

However, with pounds 1,000 per month to save, they can certainly make a good start in order to help smooth the expenditure on both school and university costs and make the prospect more affordable.

According to the Independent Schools Information Service, typical fees for a private secondary school in the Gloucestershire area (day attendance only) are pounds 2,130 per term.

In recent years school fee costs have escalated at a rate in excess of both inflation and average earnings. This emphasizes the necessity for early planning. For the sake of my calculations, I have assumed that the school fees and required university subsistence income increase at 6 per cent per annum.

The amount of money a university student is expected to live on (the combined maximum student loan and grant) is pounds 3,270 for 1995-96, assuming the university is based outside London and the student is not living at home.

My own feeling is that this total of pounds 3,270 is actually at or below subsistence level. According to the University of Northumbria more than half of the students who are starting university this autumn can expect to graduate with debts in excess of pounds 4,000.

The worst period for Martyn and Sarah will be when their children are in private secondary education at the same time, meaning the fees will be doubled. This can be seen in the graph illustrating this family's potential costs before an investment strategy is in place. The graph shows the estimated cost of education for each year.

If Martyn and Sarah do not plan ahead, their payments from taxed income will reach a maximum of pounds 22,900 in the academic year 2004. This is equivalent to pounds l,908 per month and may be beyond their means. The total cost of Adam and Samantha's education comes to pounds 198,270, assuming 6 per cent fee inflation.

In my opinion, Martyn and Sarah have three alternatives. They could make no plans at all and hope that their increasing earnings can cope with the fees throughout the future. They could save pounds l,000 per month in order to aid both children's education. Or they could take the decision to simply save as much as possible towards their younger child's education in order to ease the period when the costs are doubled.

I would choose the third option. I suggest that Martyn and Sarah should be able to afford the fees until the beginning of academic year 2002, when Samantha goes to secondary school. But it will be the following few years when they may need to draw on the proceeds of savings schemes they started (or should start) in 1995.

It is important that Martyn and Sarah do not lock themselves into an irrevocable position with any savings plan. All schemes should be made as flexible as possible. No matter how certain the parents now are that they will put their children through private school, followed by university, these ambitions may not become reality.

A balanced view should be taken and I believe that longer term investing, in order to help with university costs and the latter years of Samantha's school education, should be concentrated on equity-linked investments. The earlier years can be funded using a combination of equity funds, deposit accounts, and with-profit endowment policies.

There are four steps to the investment strategy:

o Invest pounds 559 a month into an Ivory & Sime "PrEP" (half for each child) over the next three years. The "PrEP" is a savings plan into investment trusts that utilises a tax-avoidance scheme in quite an effective way to ensure that the child receives benefits tax-free.

The purpose of the scheme in Martyn and Sarah's case is to fund for university education. I calculate that a total of pounds 550 per month invested for the next three years only into Ivory & Sime's "PrEP" will take care of Adam and Samantha's university costs in full when they eventually attend.

o Put pounds 200 a month into a personal equity plan with Perpetual. This PEP is really a tax-exempt investment into unit trusts, and Perpetual has won all sorts of awards for investment management expertise.

By saving pounds 200 per month over the next seven years until 2001, Martyn and Sarah should accumulate approximately pounds 20,728 at an assumed growth rate of 9 per cent in their PEP by 2002, when both children are in secondary education. This could be used to help fund school fees.

o Invest pounds 200 a month into a series of Clerical Medical endowment policies, the exact type and term to be determined by the couple's precise financial circumstances. These are less volatile than the PEPs, and the proceeds will also finance school fees.

o If one of the parents should die, it would be extremely traumatic for either child to be removed from school. To avoid this possibility, Martyn and Sarah should ensure that they have plenty of life cover. I calculate that the cost of insuring both Martyn and Sarah for all of the fees would be in the region of pounds 30 per month (Norwich Union).

I calculate that the effect of taking the action I have suggested will be to modify the expenditure profile over the years to that shown in the second graph.

I assume Martyn and Sarah carry permanent health insurance, although this is provided by their employers. If not, this should also be looked at in order to protect the fees in the event of sickness.

Don Clark is managing director of Torquil Clark Associates, the Wolverhampton based independent financial advisers.