Part Two: Saving to put a child through private school

In the second of a three part series for IFAonline, top advisers recommend investment strategies to put a child through private education.

Peter McGahan is managing director at Worldwide Financial Planning

There are different views taken by parents on saving. Some like to create a separate 'pot' for each area (school, holidays, weddings etc). Others like to save in one tax efficient area and then draw on that for whatever life throws at them.

Either way, the two key issues are tax efficiency, and careful management of the funds, especially as the child gets closer to using the capital.

Naturally an Isa is the most tax efficient way to save for the future, with all gains being free from capital gains tax. Access is immediate and such schemes rarely have a product charge that limits access to the capital.

As most investors rarely use their capital gains tax allowance, a unit trust / Oeic could also be used. Each parent has an annual allowance of £10,100 and this gain is free of capital gains tax. This is easily the most underused allowance with investors often bundled into expensive and tax inefficient investment bonds on a promise of tax deferred income which is often marketed as 'tax free'.

Access to the cash is everything, so often parents/grandparents will separate the pots to mature at different periods of time in the future. This is largely down to risk. For example, a parent might put aside money at birth in lower risk assets such as index linked gilts to mature for the earlier years. They might then begin saving monthly in a higher risk/potential growth area for the later years.

Where an investor has less time for their capital to grow, there is naturally less time for it to recover in the event of a marked fall. The potential for loss is always broadly equivalent to the potential for gain.

Parents, mindful of that, will know if they invest on a monthly basis, they can take much of that risk out. Whilst investments vary from a risk point of view, this can be an advantage. If there are marked falls in a price of an investment, a parent who is investing monthly will capitalise on that.

An investment such as a unit trust simply buys c60-100 stocks and shares giving the investor a wide spread of risk. These shares are all pooled together and an investor  simply buys a 'unit' in the fund. However should there be a large fall in the market, the monthly investor is now buying these at a discount, catapulting the value of the investors' capital when the market returns.

See tomorrow's IFAonline for views from Adrian Lowcock from Bestinvest