Funding your child's university years:Part 3

Going to university can cost more than £7,000 a year when you take into account tuition fees, accommodation, food, transport and socialising. IFAonline asks top advisers what parents can do to save enough money to fund their child's further education.

Richard Cook is managing director of AVD UK

The 2009 pre-budget report indicated for the first time in a decade that universities are expected to cut almost £400m from budgets in 2010/11. Just to add more fuel to the fire, there have also been calls to stop subsidised tuition fee loans for higher earning families. And although not yet officially announced, experts predict the change will be aimed at households with annual incomes of more than £25,000.

With this in mind, it is easy to see the middle classes are likely to be hit the hardest, especially as the current £3,000 per year tuition fees are reported to double in the near future. Couple this with the likely lack of financial support available and the increasing costs of living, which often escalates when studying away from home, and you can understand why some students are put off pursuing further education.

Simple maths will calculate the overall cost of putting a child through university can run into tens of thousands of pounds. This would go some way to explaining why a significant number of students graduate with debts in excess of £20,000.

Considering the duration of study and the number of children to finance through higher education, this amounts to a pretty substantial cost and highlights the urgent need for good financial planning at an early stage by both the parents and their financial advisers. And paramount to this is the vital need for tax efficiency. Without this, the option is to rely on the ever-diminishing grant system and the prospect of thousands more young people graduating shackled with sizeable debt. Most parents will want to avoid this but the question is how best to provide the right amounts at the right time in the most tax efficient, least volatile and secure manner.

Holding cash is often seen as the only way of achieving the required security, but in today's low interest rate climate, most deposit accounts offer very little growth. Therefore the security in real terms is questionable. For tax efficiency an ISA may be an option as they are free from income tax. However it would need to be a cash ISA to deliver the security, as an equity investment will not meet the low risk requirement. But then where does the growth potential come from?

Arguably, investments in equities over the long term will often prove a favourable choice but in the short to medium term, when the planning is often required, an alternative solution may need to be explored.

One alternative to consider is with-profits but via the secondary market. For years with-profits have delivered consistently good growth as profit is achieved through receiving annual bonuses that deliver a locked in guarantee. A with-profits portfolio contains a well balanced and diversified asset allocation investing in real assets. So although there is some element of risk, given a proportion of the fund will be invested in equities, the guarantees shelter most of the market volatility

At this juncture it is expected that some will question the potential within the future bonuses, however Prudential have recently announced increased bonus rates reflecting the quality of the underlying investments and asset allocation. This also bodes well for other life offices with similar asset allocation strategies.  

It is important to look for a distributor of fixed term portfolios using carefully chosen secondary with-profit policies, who can work with you to fulfil your investors' individual needs. There are growth and distribution portfolios that all benefit from fixed maturity dates to assist with financial planning. And as they are subject to CGT, they bring tax efficiency and a good opportunity to use a commonly unused allowance. These policies also benefit from FSCS protection as additional security.

So if consistency of returns coupled with low volatility, capital security and set maturity dates is the main driver for university fee planning, the secondary with-profits market should not be overlooked.