If your children are due to go to University in the next two or three years you will probably have looked on in horror at the recent changes to the cost of tuition fees.
Just what can you do to stop your son or daughter leaving University with significant levels of debt that will be a financial burden to them for many years to come?
Having looked at the cost of University in a previous article we thought we would look as some practical steps you could consider taking to help your child through this financially challenging time.
1. Work out what is needed
This might sound obvious, but if you don’t know what the problem is the solution can be hard to find.
Sit down and work out how much money is actually needed for fees and living costs, only then can you start to think about where it could be found.
2. Can the money needed be met from income?
If your monthly budget can stretch to meeting some or all of the costs of University then this is probably the best route to take. If you have previously been paying private school fees then it is likely that annual costs for University will be similar.
This route has the added advantage of not affecting your future financial planning as assets will not be spent to meet the costs of University.
It isn’t just your income that could be used, do grandparents have spare income they would be prepared to use, remember any gifts from income can carry Inheritance Tax advantages.
Furthermore could your son or daughter find a part time job to help meet costs?
3. Use existing savings and investments
If you do not have sufficient spare income or there is still a shortfall you could consider using some of your savings or investments.
Over the years you may have accumulated savings, perhaps now is the time to call on these.
Savings are generally in the form of deposit accounts with banks or building societies, investments are often in the form of stocks and shares; which ones should you use first?
The answer to that question really does come down to personal preference, however as a rule of thumb ISAs should be used last as these have tax advantages over and above other forms of savings or investments.
For any non ISA investments, you should consider the tax consequences of encashment. For example, you may be able to realise both losses and gains to your advantage. Or it may be more advantageous to encash one policy over another depending on your own tax status.
If you are considering cashing in your investments, which may well have been held in the stock market, you need to think about market timing. For example an investment surrendered in 2010 may well have produced better results than if it had been surrendered during the doldrums of 2008.
Unless you are an experienced investor with an excellent knowledge of investments, we would suggest you take advice from an Independent Financial Adviser before cashing in any investments, some decisions cannot be reversed once taken!
Finally, think about what you were saving or investing for in the first place. If you were indeed making provision for your child’s University expenses then now is the time to use this money. However, if you were saving for another goal, then you will need to make up the money you take out. Think about how you can do this, do you need to save more each month? Can the goal, whatever it is, be delayed?
4. Use your pension and delay retirement
Let’s make no bones about it; pensions are there to help provide us with an income in retirement. However, in extreme circumstances they can be used for other purposes along the way, but beware, there are drawbacks.
Over the past few years pension legislation has changed, for example it is now possible to access a pension fund from the age of 55; furthermore it is possible to take the tax free lump sum and / or the income without actually having retired.
As a result of these changes there are a small but growing number of parents taking money from their pensions, generally in the form of the tax free lump sum, to help with the costs of University.
There are of course significant drawbacks to this course on action, and taking retirement benefits early is unsuitable in most circumstances and will reduce your income in retirement.
Any shortfall in your retirement provision as a result of taking a lump sum from your pension could be extremely hard to make up and it is likely that you will end up working past your anticipated retirement age. You should consider how you would meet increased pension contributions from your income and it is wise to begin with an illustration of the costs involved.
Taking money from a pension fund to meet University fees is being done by parents. However, before drawing early on your pension to meet a specific financial need you should consider firstly accessing other savings and investments as alternative sources of funding. All the pros and cons of each option must be considered and we would always recommend advice is taken.
Few parents want their children to leave University with large amounts of debt and if you have children going to University in the next few years the increase to tuition fees will have come as a shock.
However, it is no different to meeting the cost of any other financial problem. Plan how much is needed for the length of the course and work out how much can be funded from each source, looking at spare income first, then savings. If these sources are insufficient then consider pensions and loans as a last resort.
Don’t forget to take advice, two heads are generally better than one and an experienced financial adviser will be used to helping his or her clients with this problem.
If you would like to discuss your own situation, do not hesitate to call our advisers on 0845 074 7778 or 0115 933 8433, they are experienced, knowledgeable in this area and here to help.