Tuesday 27 June 2017

How to make grade on college funds

In 20 years' time, it could cost €72,000 to send a child to college. How on earth will parents manage that, asks Louise McBride

STUDY BREAK: Meeting the cost of a child's higher education will require some clever investment and saving
STUDY BREAK: Meeting the cost of a child's higher education will require some clever investment and saving

MANY Irish dads may dream of following in Homer Simpson's footsteps and raiding the family's college funds. But as it now costs €10,000 a year to send a child to college, parents would be foolish to do so.

Most children go to college for about four years, which brings the college bill for one child to €40,000. This bill gets even scarier if your child is not due to begin college for another 10 or 20 years.

If your child goes to college in 10 years' time, inflation could have pushed up the cost of four years' college education to €54,000, according to Gary Hanrahan, principal of the financial advisers, Capital Options. If you plan to send your bawling newborn to college in 20 years' time, inflation could have pushed up the cost of four years' college education to €72,000, according to Hanrahan.

So how on earth would you come up with that kind of money?

LUMP SUM

If you have a hefty lump sum to hand with which you don't want to take any risks, you could invest it in an ordinary deposit account. If you choose a deposit account which pays 3 per cent interest a year, you would need to invest a lump sum of €40,181 today to hit a €54,000 target after 10 years, according to Hanrahan.

"If you put your lump sum into a higher risk investment which made an annual return of 5 per cent instead, then the initial lump sum required today would be €33,151," says Hanrahan. This, of course, assumes that your higher-risk investment makes money, rather than loses it.

To meet a target of €72,000 after 20 years, you would need to put a lump sum of €39,864 into a deposit account which pays 3 per cent interest a year, according to Hanrahan.

"If you put your money in a higher-risk investment which makes an annual return of 5 per cent, then the initial lump sum required today to meet that €72,000 target would be €27,136," says Hanrahan.

Some deposit accounts recommended by Hanrahan for a lump sum include the State 10-year National Solidarity Bond, which pays 4.14 per cent interest a year over 10 years; and Permanent TSB's 'Take 5' five-year fixed rate account, which pays 4.56 per cent interest a year on lump sums of €10,000 or more. "Neither of these has any additional investment charges," says Hanrahan.

If you choose Take 5, after five years you must find another deposit account which pays at least 3 per cent interest a year for the next five or 15 years -- depending on how long your child has left before they go to college. Similarly, if you choose the National Solidarity Bond, you will need to find another home for your lump sum after 10 years if your child doesn't go to college until 2031.

If you're prepared to take some risk with your money, Hanrahan recommends investing your lump sum in Standard Life's Global Absolute Return Strategies (GARS) fund. The GARS Fund is an absolute return fund -- which means that it aims to deliver an investment return to you regardless of any volatile stock market movements.

The annual return on this fund has been 8.2 per cent since its inception in 2006. But past performance is no guarantee of future returns -- and there's no capital guarantee on this fund, so the value of investment and any income you earn from it could go down as well as up. You must also pay an annual management fee on this fund.

REGULAR SAVINGS

If you would prefer to save a certain amount of money each month for your child's education, you can either save into a straightforward deposit account or an account that invests on the stock market.

Alan Morton, managing director of Moneywise, recommends Irish Life's Pinnacle savings plan, which puts your money into various investment funds.

With this plan, you must save at least €250 a month for at least five years (though you can take a payment holiday if you cannot afford to make these savings at a particular time). It's also possible to invest lump sums of between €650 and €25,000.

You can withdraw your money within the first five years -- though there is a charge if you do so. There is no charge on withdrawals after five years. There's also an annual management fee on this investment.

"The annual management fee starts at 0.75 per cent for many of Irish Life's own funds," said Morton. "To get the 0.75 per cent charge, you must come up with an initial investment of €7,500 at some stage in the first year. The annual charge is 1.25 per cent for Irish Life funds otherwise."

Irish Life also pays a 1 per cent bonus on regular savings or lump sums paid into the plan -- which helps offset the cost of the 1 per cent government levy.

You should only consider Pinnacle if you're prepared to take on a certain amount of risk as the investment is not capital protected.

Rabobank's savings and deposit plans may also be worth considering, according to Ross Curran, managing director of the financial advisers, Curran Financial Services. "At around 1.5 per cent, the fees can be quite significant," says Curran.

If you prefer ordinary saving deposit accounts, Curran recommends AIB's Parent Saver Account and Ulster Bank's Special Interest Deposit Account. Both pay 4 per cent interest -- up to certain limits. "Beware that most accounts of this nature offer a preferential rate for the first year only," says Curran.

Hanrahan recommends EBS's Family Savings Account, which pays 4 per cent interest in the first year and 3.6 per cent interest in the second year.

One of the best approaches to saving for your child's education is to save a lump sum initially -- and to save regularly thereafter. If you save a lump sum of €10,000 today, you would need to save €289 a month over the next 10 years to meet a target of €54,000 (if your money is in a deposit account that pays 3 per cent a year). If your money is in an investment product that makes an annual return of 5 per cent, you would need to save €241 a month on top of the €10,000 lump sum, says Hanrahan.

If your child will go to college in another 20 years, you would need to save €164 a month -- on top of the initial lump sum of €10,000 -- to hit a €72,000 target if your money is in a deposit account that pays 3 per cent interest a year, according to Hanrahan. If you put your savings into an investment product that earns a 5 per cent return a year, you would need to save €109 a month on top of your €10,000 lump sum.

STOCK MARKETS OR DEPOSIT ACCOUNT?

You could pocket more of an investment return on your money -- and have less to save for your kid's education as a result -- if you invest it in the stock market. However, most stock market investments carry a degree of risk -- something you may not wish to take with your children's education. Charges are also usually higher on such investments.

"Despite the current turmoil, historically it has been shown that even modest exposure to equities and other types of investment can increase your investment returns by a minimum of 2 per cent a year," says Curran.

"Clients must be willing to accept fluctuations in the performance though. Do not use the savings plans of life assurance companies or any plan where you hear the term 'units' being used as a way to calculate value. These products are very difficult to analyse for performance because it is almost impossible to get a breakdown of the total charges. However, you will likely pay well over 1 per cent a year in charges, irrespective of performance, which is a major drain."

If you have a good understanding of investment (as well as the time to manage them), Curran recommends online platforms such as www.optionsxpress.eu and www.fxcm.co.uk as the cheapest route to stock market growth.

"I'd recommend using a fee-based adviser for these platforms though," said Curran. "Also, with online platforms, the fees for buying funds and so on tend to be fixed, so often it would be best to save in a regular deposit account for one year until there is sufficient money to make it cost-effective."

Morton also advises an equity-led investment approach if you have 10 or 20 years to save for a child's education. "But a less aggressive investment approach should be chosen as the time approaches to pay for college fees," advises Morton.

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