Saturday 25 January 2020

It's never too early to start saving for their college years

If you want your children to go to university, start financially preparing now, writes John Cradden

THE aspiration among parents to see their children go to third-level education remains as high as ever, but quite a few parents are overlooking the obvious need to put money away as early as possible to help fund it.

According to new research by Bank of Ireland Life and online parent resource, 99pc of parents want their children to progress to third-level education but 55pc of them have yet to start saving for it.

The survey also shows that parents are funding third-level education in different ways, with 43pc using savings, 23pc availing of education grants, 19pc using day-to-day money and 15pc taking out a loan to send their child to university.

Of those who have started to save, 42pc are only saving between €20 and €50 per month.

However, most of these respondents are not unaware of how much they should be saving, with 70pc believing that they need to save between €100 and €500 a month.

The reality of college fees, expenses and, in many cases, student accommodation, means that third-level education will cost about €10,000 a year on average.

But if they also want to put some aside for second-level too, Kevin McNerney of Dublin-based First Rate Financial Planning, calculates that parents would need to be saving about €230 a month per child if they started when the child is born in order to build a €50,000 fund.

That monthly amount would have to rise to nearly €300 a month if they waited until the child started primary school.

"If they decided to wait until the child started secondary and only wanted to save for third-level, the parents would need to be saving approximately €530 per month to reach a €40,000 target." However, this does not factor in inflation.

"When you factor in inflation, if your child is due to go to college in 10 years then the target needed to reach will increase to €54,000," said McNerney.

"If it is going to be 20 years before they will be going to college, then the figure will have increased to €72,000."

A good way to get into the savings habit is to save your child benefit, he adds.

"Ideally, they should start it from the outset so that they don't get used to having the money in the first place."

Bob Quinn of Kildare-based Money Advisers agrees that child benefit is a good place to start, but says: "I would be more in favour of saving a percentage of household income instead of linking education costs with child benefit."

He adds that too many parents will fund third-level out of their household cash flow, which can create problems if one parent loses their job.

But no matter what way you do it, it's never too late to save. "We would very much believe that time, not timing, is what investing is all about," he said.

So what are the best savings and investment vehicles for such a purpose?

Mr Quinn says savings vehicles should be selected based on the savings goal, but the bottom line is any term less than three years should be placed in a deposit account, where risk to your capital is limited.

"If it's a term in excess of three years, I would encourage my clients to look at a diversified investment of some description."

He also suggests checking out the tax treatment of various types of investment, something he says a lot of people don't consider.

"If people are already nursing capital losses from investments that have gone wrong, such as property and bank shares, they may want to invest in the type of investment that is 
subject to capital gains tax (CGT) on exit, where future gains from these investments can be offset against previous CGT losses."

According to McNerney, the best offers available at the minute for regular saving accounts are from KBC and Nationwide UK.

KBC's account has a return 4.5pc AER (annual equivalent rate) but you need to have a current account with the bank to qualify for this rate, otherwise it's 3.5pc AER.

Nationwide UK offers a rate of 4pc AER for amounts up to €15,265.

Other rates range from 2.25pc to 2.7pc with other banks like Permanent TSB, AIB and EBS. Permanent TSB has a rate of 2.65pc.

For those who want a higher rate of return and are prepared to accept a bit of risk, he suggests Irish Life's Pinnacle account, which gives you the option to invest in various funds.

There is an annual management charge of 1.25pc a year, and there are also penalties if you take money out within the first five years, but if you're saving for the long term anyway, this may well be a good thing.

Bank of Ireland Life has a product called Target Saver that has a number of features that may be 
attractive to those that are saving for third-level, including a more growth-oriented investment approach early on, and an automatic switch to a cash fund when your target sum has been reached, according to Bernard Walsh, BOI Life's head of investments.

Irish Independent

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