Single premium bonds: The solution to funding university?

Single premium bonds could provide the solution to the rapidly-growing funding requirements needed for children going to university, according to one chartered financial planner.

Speaking at the Personal Finance Society conference in Birmingham, Brian Benson, of Crown Wealth Management, gave delegates a brief overview of this often-overlooked area of investment.

He presented a scenario where the parents were additional rate tax payers and had two children, aged ten and eight, with the need for funding in eight years time.

They have £120,000 available for investment and are already utilising their ISA allowances.

Offshore investment bond

• £120,000 made up of 100 segments
• Assign ten segments a year to each of the children for the five years of study
• Will not be chargeable events and then children will then be able to encash them at their own tax rates

For the ten year old

• In eight years time the segments have grown in value to £19,126 (Assuming 6% growth after charges) with a gain of £7,126
• Personal allowance has increased to £8,885 (Assuming 2.5% a year increase in personal allowance from £7,475 in April 2011)
• If no other income no tax payable as entire gain falls within their personal allowance
• This compares to a 40% or 50% gain if parents had encashed bond.

For the eight year old

• The final ten segments have grown to £27,130 and the gain is £15,130 per segment
• Personal allowance has grown to £10,300 with no other income that year
• Basic rate at 20% on £4,830 above the personal allowance means an effective rate of 6.4%