Financing a child’s future

Funding a child’s path to adulthood is a long-term commitment for parents.

Any new parent will tell you a child is expensive from the outset. There is so much to be bought to cater for a new member of the family, but this is just the first step of many building up to a child’s financial independence.

The first ongoing cost encountered is often childcare. There is some government help available, which varies across the UK, but these schemes come with specific requirements and often need supplements because of time constraints or exclusions. For example, ‘free’ childcare for three- to four-year-olds in England may only cover 38 weeks of the year and may not include costs such as lunches. 

Education, education, education

Costs can jump dramatically at the next stage of education if you choose private schools. Average junior school day fees are £4,342 a term, while at the other end of the journey, sixth form boarding school fees are £11,821 a term, according to an April 2018 report from the Independent Schools Council (ISC). School fees also normally rise faster than general price inflation: fees increased by an average of 3.4% from 2017 to 2018, the lowest rise since 1994. Education increasingly has costs attached for children at state schools as well, whether it be requests for materials from schools or technology requirements, such as laptops.

Thanks to reforms in tertiary education, costs can now rise further once university education starts. Again, the rules vary throughout the UK’s constituent parts. Tuition fees are up to £9,250 for English residents at English universities, £9,000 for Welsh residents at Welsh universities and £4,160 for Northern Irish residents at Northern Irish universities, but nothing for Scottish residents attending Scottish universities. Fees are typically financed by loans, which also provide for student maintenance. This is often the first time a young adult will manage their own finances.

Out into the world?

The result is that graduates can emerge into working life with significant debts, to be repaid out of earnings. For example, in England, repayment is set at 9% of income above £25,000 a year (for a plan 2 loan), and loans carry a variable inflation-linked interest rate, currently up to 6.3%. The relatively high interest rate and, in England and Wales, a 30-year write-off period, mean that five out of six student loans will never be fully repaid, according to the Institute for Fiscal Studies.

Student debt, potentially running on until a graduate reaches their early 50s, introduces another issue for parents supporting their children: funding the first home. The so-called ‘Bank of Mum and Dad’ has come to the fore in recent years as many first-time buyers have to rely on family assistance to gather enough for a deposit.

The picture that emerges is one where a child will need varying degrees of financial support for perhaps the first 25 years of their life. There is no single way for you as a parent – or grandparent – to handle these demands. In some instances, outright gifts may be the answer, whereas in others the use of investment via trusts or even drawing on existing pension arrangements may make sense.

The key to any solution is to start planning as soon as possible with professional advice and to integrate the process into your overall financial strategy.

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