The A-level results will have many students nervously checking to see if they’ve achieved the necessary grades for their preferred University course. Equally, there will be many concerned parents contemplating how they can provide financial support for their child’s studies.
The Budget contained a couple of measures that will score top marks for clients looking to help fund their children through university. And these could influence both where they save now, and how they use their savings when the time comes.
Firstly, from next April there will be no limits on how much can be withdrawn from ‘money purchase’ (or DC) pension savings. This opens up the possibility of using the pension funds to meet university fees.
Secondly, at the same time, the savings rate tax band will be extended to £5,000 and savings income falling in this band will be tax free. And this means non-taxpaying students will be able to take up to £15,500 of chargeable gains from offshore bonds for each year of study without a tax charge.
How much will it cost?
More than half of parents potentially underestimate the maximum amount of debt their child could be saddled with on leaving university. Our own research has shown that some 58% of parents think the figure is less than £40,000 – some think it’s well below that figure.
According to the National Union of Students, the average student expenditure is £22,189 each year. This includes tuition fees, accommodation and living costs. For a typical three year course, that’s almost £67,000.
If you look at today’s 10 year olds commencing studies in 2022, they would need in the region of £83,000, assuming inflation of 2.5%.
A new way to save
The Budget threw up an alternative way of saving for university fees – through a pension. From next April, pensions will become accessible much like bank accounts for the over 55s. This opens up the possibility of tax relievable uni fees funding. Our earlier insight demonstrated that pension saving will give a better return than an equivalent ISA in all but a few extreme cases. Of course, those making gifts from their pension savings will need to ensure they can still meet their future income needs in retirement.
The only remaining barrier to accessing pension savings under the new flexibility rules is that the saver must be at least age 55. This shouldn’t be a problem for most grandparents in a position to help out, but some younger parents may not reach that age by the time their child completes their studies. But there’s always the option to make use of the generous rates available on student loans, which can eventually be paid off once the parent can access their pension.
Students are able to take loans to cover their tuition fees and living costs for each year of their degree. Loans to cover tuition will depend on the fees charged by the university, which currently can be no greater than £9,000. The maximum annual loans towards living costs for courses starting from September 2014 are £7,751 in London and £5,555 outside London, depending on parent’s income. These loans don’t need to be repaid until the student starts work and is earning more than £21,000 a year. With generous rates of interest (currently a maximum rate of RPI plus 3%) it could pay to take advantage of the loan to allow greater time to save.
A boosted tax free allowance for students
The changes to the savings rate band next April will see non-taxpayers, which will include many students, able to receive an extra £5,000 in savings income completely tax free. The personal allowance is set to increase to £10,500 next tax year. So for a student with little or no earnings, that’s a total tax-free allowance of £15,500.
That’s a great boost for parents or grandparents who have planned to help fund the costs with an offshore bond. Offshore bonds or bond segments can be assigned to the student to cash in and the chargeable gain will be assessed upon them. As gains from offshore bonds are taxed as savings income, provided they’re kept within £15,500 they won’t be taxed.
Over a three year course, that’s up to £46,500 in chargeable gains which can be taken free of tax. That’s an extra £13,200 compared to the equivalent CGT tax free allowance (£11,100 2015/16).
And remember, the proceeds received could be much more than the gains made, potentially providing the student with more than enough to pay their way through university.
There’s also an inheritance tax advantage to this strategy. The assignment of bond segments from a parent to meet full-time education costs is likely to be immediately outside the estate. Assignments from grandparents will be a potentially exempt transfer and this will be IHT free after seven years.
Funding a good education needn’t be taxing and, with the right financial planning, it can achieve great results for everyone.