School fees: lesson one

Continuing a series on financial planning, Rachel Fixsen looks at school fees

Choosing a school for your children is one of the most important decisions you have to make. Private schools often do not even come into the equation because of the high fees. But for many people, a little financial planning can make independent schools an option.

"The sooner you start the more effective the investment will be," says Clive Scott-Hopkins of Towry Law. "Particularly if you have more than one child, if you have to fund school fees out of taxed income for them at the time you'll find it an impossible burden," he warns.

Termly fees at most private schools range from pounds 1,300 to pounds 3,200, according to the Independent Schools Information Service. For boarding schools the fees are far higher.

In principle, saving for school fees is no different from saving for any other type of goal. Many different investment vehicles would be suitable. But since fees are generally payable termly or annually, you can make the most of investment growth by tying up the money ear-marked for fees in the later school years for as long as possible.

Mr Scott-Hopkins recommends traditional endowment policies. An endowment is a life insurance and savings policy which pays a specified amount of money on an agreed date, or on the death of the person insured, whichever is sooner. The premiums paid in are invested by the insurance company providing the policy. Parents would take out a series of endowment policies all set to mature in different years, with one maturing each time annual fees are due. For example, a 29-year-old father could take out five endowments with General Accident, each designed to mature on a particular year between his child's 13th and 18th birthdays. If the child was one when he took out the policies, the cost would be pounds 1,409 a year in premiums. This assumes the endowment with profits gives a 7.5 per cent return, and that the school fees themselves increase by 3 per cent a year.

Personal Equity Plans are another option for school fees savings. You have access to stock market levels of growth and returns are tax free if you invest up to pounds 6,000 a year. PEPs will be replaced with Individual Savings Accounts next year, but in most cases PEP investments will simply be transferable into this new tax-exempt wrapper.

Split capital investment trusts are often recommended by school fees specialists, and these can be taken out within a PEP.

A split capital investment trust winds up on a certain date, which you can choose to coincide with one of the dates school fees will become payable. The trust has various types of share, but zero dividend preference shares can be the best for the purpose of school fees planning. They are low- risk investments which pay no dividend but pay a predetermined capital sum at the end of the fixed life of the investment trust company. The return is not guaranteed, but this particular type of share is normally first to be repaid from the company's assets.

However, many parents do not consider how they will pay for private school until two or three years before they want their child to start. "They often assume it's too late to do anything at all," says Roger Elgood, schools liaison officer at School Fees Partnership, which introduces parents to independent financial advisers specialising in school fees planning.

Plenty can still be done at that stage, says Mr Elgood. "Drawdown schemes make the most of equity in your home to borrow for five years and then use other financial instruments to spread the burden of repaying over, say, 10 years. Keen competition between mortgage providers means that simply by remortgaging your home you can cut your interest payments. "But it's a complicated area. You really do need a specialist to put the thing in place," he says.

If you have a particular school in mind for your children, it may be worth approaching them to see if they have fee payment schemes. But you should make sure these compare favourably with other investment schemes in the marketplace, and you also need to be certain money you put in in advance can be moved if the child moves schools, warns Mr Elgood. However, for some people, saving for school fees may not be a good idea. In certain professions, particularly lawyers and accountants, you may be on a lowly salary in your thirties and would be hard pushed to afford premiums on a school fees savings scheme. But a decade later when your children are actually at senior school, you may have been promoted and be easily able to afford the fees out of income.

Towry Law: 01753 868244. School Fees Partnership: 01287 624 700. Wesleyan Financial Services: 0800 22 88 55.

`The Independent' has published a free guide, `Making Your Investments Work For You', which covers every aspect of financial planning, is sponsored by Wesleyan Financial Services. To obtain your copy, call 0800 1379749 or fill in the coupon on page 10.