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The £230,000 reality of raising a child

Published: 16 September 2016

Parents all over the country will be dipping deep into their pockets to support children embarking on their university lives this autumn. And with good reason, as the financial challenge facing students and their families can be formidable.

For example, universities in England and Wales can charge fees of up to £9,000 a year (rising to £9,250 next year). But this only covers the cost of tuition. When study materials, groceries, rent and other costs are added on it’s easy to see why students attending these universities are at risk of leaving higher education with debts that could take years to clear.

In fact, eight in 10 students worry about making ends meet, the latest National Student Money Survey found. Those worries will be shared by many parents, for whom university will be just one of several life stages when they are called upon to help their children financially.

The average child born this year will cost their parents more than £230,000 by the time they turn 21, according to the Centre for Economics and Business Research and LV, rising to nearly £500,000 if the child goes to boarding school.

Invest in your child’s future, today

Putting money aside regularly, from as early as possible, will help you meet these costs and get your child off to the best possible start in life. A YouGov survey last year found that around 75% of parents in the UK have opened some form of savings product for their children.

ISAs are an obvious first port of call

ISA are a good starting point, due to their tax benefits. Currently, you can pay up to £4,080 a year into a Junior ISA for your child, and up to £15,240 in your own ISA.

With interest rates at a record low, cash savings now offer limited scope for growth. An alternative is to use your ISAs to invest in the stock market through collective funds and trusts.

If you invest £200 a month through a Junior ISA from when your child is born, their fund could be worth a more-than-useful £68,100 by the time they turn 18 (assuming annual growth of 5%). Remember, though, this isn’t guaranteed and investments can go down as well as up.

A Junior ISA from birth could add up to*
infographic

* Example only. Not guaranteed. Capital at risk.

Even if you can’t afford that much today, long time-horizons from starting early mean that even modest regular investments could produce funds that make a real difference to your child by the time they enter higher education.

One potential downside of Junior ISAs is that while a parent or guardian manages the account the money belongs to the child, who can do as they like with it from age 18.

If you want more control over your child savings that’s when using an adult ISA can come in. Any adult in a child’s life who wants to use their ISA in this way can get involved. But remember the money in it belongs to them, so they decide if and when it comes to the child.

Cost of raising a child

Important information

These articles are designed to help investors make their own investment decisions. They do not constitute a personal recommendation to invest. If you have any doubts as to their suitability you should seek expert advice. Please be aware that the value of investments can fall as well as rise so you could get back less than you invest.

Your existing pension may have valuable benefits which you might lose when you transfer.

Laws and tax rules may change in the future without notice. The information here is our understanding in August 2016.This information takes no account of your personal circumstances which may have an impact on tax treatment.

Past performance is not a guide to future performance.
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Other things to consider

If you have the means, investing in a property can be a way to help children going to university as rental income is likely to be one of their biggest expenses (just under half of their total budget, according to the latest National Student Money Survey).

That might involve helping out with a deposit so a child can buy a home, or simply buying one outright in your name that your child can live in during their university years.

Setting aside funds in a trust can be another efficient way for family members to help cover education costs while mitigating their inheritance tax liabilities. Straightforward cash gifts can also be given.

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Alliance Trust Savings Limited is a subsidiary of Alliance Trust PLC and is registered in Scotland No. SC 98767, registered office, PO Box 164, 8 West Marketgait, Dundee DD1 9YP; is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, firm reference number 116115. Alliance Trust Savings gives no financial or investment advice.