Spread a little risk for the family: Endowment policies are not always best to pay for school fees. Sue Fieldman passes on a few lessons

Parents who have taken out endowment policies to pay for school fees could have to dig deep into their pockets to make up a shortfall in the payout.

Endowment policies are often sold as an ideal vehicle for school fees planning - perhaps not surprisingly when financial advisers earn a thumping great commission on them.

However, turbulent investment conditions have resulted in insurance companies reducing their bonus rates, thereby cutting the final payments.

Martin Jones, senior manager at the chartered accountants Coopers & Lybrand, said: 'I expect returns to continue reducing over the next few years.

'There will be a whole raft of policies maturing next year - the 10-year policies that were taken out in 1984 just before they stopped giving the subsidy on premiums. That will really be a time to hang on to your seats.'

If you have an endowment policy that is mid-term, stay with it. However, get advice now on whether it is necessary to make alternative investments in the event of a shortfall in the amount needed to cover the fees.

Despite the reduced returns, Mr Jones reckons that endowment policies still have a place in school fees planning.

However, he believes they should not be as near the top of the list as some financial advisers - with their hands firmly placed on their wallets - put them.

Mr Jones said: 'There are some good points to endowment policies. But they are very inflexible, and they are not really very tax- efficient. Surrender values can also be very poor in the early years of the policy's existence.'

He suggests that you should look at investments such as tax- exempt special savings accounts (Tessas), National Savings certificates and personal equity plans.

It is also worth investigating other regular savings plans such as investment trust savings schemes or unit trust regular savings before you automatically plump for the endowment policy route.

School fees planning is all about chosing a variety of investments. Joe Collins, of Invest for School Fees, said: 'You have to go for the mix-and-match approach.

'You must not have 100 per cent PEPs or unit trusts or other equity investments, otherwise you could be caught out.'

If your adviser offers you only one investment vehicle for school fees, always ask why. You should get advice from a number of sources and always compare the schemes on offer.

But remember that most schemes marketed as 'school fees plans' are little more than familiar well-worn investment products - frequently endowment policies - dressed up for the purpose.

Ian Pilbeam and his wife Diana have three children - Natalie, aged 11, Sally, who is eight, and Cheryl, who will soon be three.

Mr Pilbeam, a director of the Creative Centre, a design and marketing agency in London, at present pays pounds 1,530 school fees (without extras) for the two older girls.

In September, Natalie changes schools and the joint fees will rise to pounds 1,870. He was unable to plan ahead for their school fees.

Next year Cheryl will start private school. This time Mr Pilbeam intends to join the ranks of the 20 per cent of parents who have made some attempt at school fees planning.

To this end he saw a financial adviser this week who was offering a 'school fees plan'. He was singularly unimpressed.

Mr Pilbeam said: 'We do not have any Tessas, PEPs or saving schemes, but all he talked about was an endowment policy for the school fees.

'Then he switched to talking about other sorts of life insurance.

'He was a very pleasant person - not at all pushy - but he did seem to be only interested in insurance.'

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