Passing the final hurdle

Abigail Montrose and Ken Welsby consider the options for meeting further education costs

Parents can save towards meeting the costs of higher education in a variety of ways. The three main factors to consider are the amount you can afford to save each month or year, the age of your children and the amount you want to raise.

The simplest option is to put a regular amount in the building society each month; those with five years or more to save can save in a tax-exempt account (Tessa), which means all interest on their savings would be tax- free at the end of five years.

For those prepared to take some risk, investing in the stock market offers more potential. The most tax-efficient way to do this is through a personal equity plan (PEP), which shelters any growth or income from the shares from tax.

There are hundreds of PEP schemes which would be appropriate savings vehicles, some requiring an investment of as little as pounds 20 a month. Most of them invest your savings in unit trusts, which are ideal for newcomers to the idea of investing in shares since the decisions on which shares to buy and sell - and, just as importantly, when to do so - are taken by experts whose judgement generally will beat that of the armchair investor.

Barclays Unicorn has just reduced the minimum investment on its PEP to pounds 20 to encourage people to save for their children's higher education through their scheme.

To illustrate how such an investment would grow, if you had a child in 1980, and had put all your child benefit payments month by month into a fund such as Barclays Unicorn General Trust, you would now have about pounds 18,000 towards your teenager's higher education.

It's important to remember that the value of unit trusts - like all stock market investments - will fluctuate. So this is a savings route to consider with children in their early teens or younger.

Certainly, to take advantage of a unit trust's full potential you should try to leave your money invested for at least five years. If, by chance, you have a lump sum - perhaps a bonus from work or a recent windfall - remember that you can invest up to pounds 6,000 for each tax year in a PEP.

So you can put pounds 6,000 into a plan this month for the 1997/98 tax year, and do the same again at any time in the following tax year. Or you could make a lump sum payment now and then start a regular savings plan from April onwards.

With so many PEPs to choose from, which one will be suitable to save for higher education? Since your goal is to make your money grow between now and when your child reaches 18, look at PEPs investing in unit trusts which specifically aim for capital growth, rather than those which aim to pay out a regular income.

Unit trusts are grouped in various sectors according to how and where they invest. But not all unit trusts can be held in a PEP - in simple terms it must be one which invests mainly in the UK and continental Europe.

The bad news is that some of the top performing unit trusts do not qualify for tax-free PEP status because they invest mainly in the US or the Far East. The good news is that those which invest nearer home are generally seen as safer bets for the small investor.

One of the good PEP-able growth sectors of the last five years has been UK Smaller Companies. pounds 1,000 invested five years ago in the top-performing fund in this sector (Hill Samuel) would be worth about pounds 3,360 today, assuming you had not touched any of the income. Other good performers which invest in UK smaller companies include unit trusts from Britannia, Invesco, Morgan Grenfell and Schroder.

If, instead, you had looked at funds investing in Europe, pounds 1,000 invested in the top-of-the-table Old Mutual would have been worth pounds 3,160. Also worth a look in this sector are the funds from Jupiter and Gartmore.

Many of these funds will sell to you directly by telephone, but you must remember that the person on the other end, however he may describe himself, is really in the business of selling a product.

If you are uncertain about any aspect of investing in a managed fund, or you simply want some specialist help in finding the right fund to meet your needs, you should talk to an independent financial adviser. When you talk to an IFA he or she will take you through a detailed enquiry into your finances - known as a fact-find - to be sure that you are getting the right advice.

It's also worth noting that some of the good performing unit trusts are not marketed directly, and are generally available only through IFAs and stockbrokers.

You should also be aware that not all funds offer monthly savings plans; some want minimum lump sums of at least pounds 1,000 or more. Again, this is the sort of information that an IFA will have at his fingertips.

PEPs are not the only tax-free investments. Others include friendly society schemes, which are geared to the needs of modest savers. British Benefit Friendly Society has just launched its Education Plan. For as little as pounds 15 a month you can build up a tax-free lump sum which your child can then use to help them repay a student loan or any other debts which may build up in further education.