Monday 4 April 2011

A Junior ISA to Fund University Fees? (UK)

One of the costs for UK parents must now budget for is putting a child through university. This is a cost that is growing rapidly - several universities have announced that they intend to charge £9,000 a year in tuition fees; living costs must also be taken into account.

Also, recent changes to the student loans arrangements have been made - but these result in more of a student tax than a student loan.

Would it be possible to use a Junior ISAs to save for university costs?

Junior ISAs will  be available from November 2011 for children under age 18 that don't already have a Child Trust Fund (CTF). Children will be able to have one cash and one 'Stocks and Shares' Junior ISA at any time, with an overall annual contribution limit of £3,000.

Funds in junior ISAs will be 'locked in' until the child is 18, and the accounts will then, by default become adult ISAs.

One of the tax benefits for parents is that it is a way around one of the awkward income tax issues - the 'parental settlement' rule. Currently, if a parent gives money for an investment in the child's name and the annual income from that is £100 (£200 for joint gifts) or greater, the parent is required to pay tax on the income. The Junior ISA would avoid this restriction.

Investor's Chronicle reports that Fidelity has calculated that someone going to university in London in 18 years' time could need  over £73,000 to cover their living costs and tuition fees for three years and that to save this amount you would need to put aside nearly £210 a month (that's just over £2,500 a year) to achieve this, based on 5% growth per annum.

The Junior ISA might therefore be attractive for a family that has spare cash for 2 adult ISAs (assuming a married couple) and and a junior ISA.
However, in some cases (mine in particular) there may be no a tax advantage - for example, if your family's 'passive' income from savings and investments is not currently taxed. A Junior ISA then just becomes a mechanism to transfer money into your child's name.

However, a better wheeze may be to take out a pension for the little darlings. As I pointed out before, if you make the maximum annual contribution of £2880 the government makes it up to £3600 - an instant return of 25%. You can then leave that to grow in a SIPP as a long-term gift - importantly untouchable (by the child) until they are fully mature (!) as well as being out of the reach of the taxman - particularly in relation to IHT.

That still leaves the cost of university to be covered. But if your child's retirement is secure (in part thanks to the government), then perhaps you can free up some of your capital to help them avoid the student fees trap.

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.