Lessons in finance

By TOBY WALNE, CHIEF MONEY REPORTER
Updated: 19:00 EST, 31 August 2003

A HARD lesson in finance awaits parents who put children though nursery school and private education without planning ahead.

Some families are lucky enough to live near good state schools, but many, particularly in cities, choose private education. And it's not cheap.

This year, the number of children educated privately topped seven% of the English school population for the first time with almost 600,000 in private school places.

The latest research suggests that a child born this year will cost at least £130,000 to put through nursery, private school, and finally university.

Families who choose boarding school or live in London, where costs are higher, could see the bill soaring past £300,000 per child. Luckily that cost is spread over many years, but planning is still the answer.

Mark Dampier, financial adviser at Hargreaves Lansdown in Bristol, says: 'Paying for education is a real headache whenever you start, but it is vital to begin saving early and keep a constant idea of how much it will all cost.'

He accepts that many parents have little opportunity to save towards their children's education with most paying fees directly from salaries.

But child benefit can kick-start the savings - parents pick up £15.75 a week for their first child and £10.55 for any thereafter.

'For tax reasons, a cash Isa may be the best idea,' suggests Dampier. The maximum that can be saved in one of these is £3,000 a year. Investors pay no tax on the interest but they may only be taken out in adults' names. Top cash Isa deals are listed here.

Cash savings provide an excellent buffer for shortterm financial demands, but a different strategy is needed for the long term as private education costs are rising at more than seven% a year, outstripping even the best savings rates.

Dampier says: 'Catchy-sounding with-profits baby bonds are heavily promoted, but I believe straightforward equity funds offer better value for parents willing to tie up their money for at least 10 years.'

Ray Boulger of national mortgage adviser John Charcol believes the solution may be found in the home.

He explains that with today's low interest rates on savings accounts, it can be more effective to pay down a mortgage, reducing the amount of interest owed. Rearranging the mortgage at a later date can release funds for education. This can work well for higherrate taxpayers.

Another option is simply to move house. Homes near the best state schools are typically 33% pricier, but the extra mortgage may cost less than school fees.

Penny and Mark Smith from Clapham, south London, are already planning for their children's future, even though Amy is just ten months old.

Penny, 35, is a violinist, and husband Mark, 34, is an airline pilot. They recently enrolled their eldest child Dan, 3, in a nursery.

Penny says: 'We find it hard to save at the moment, having spent almost all our savings on improvements to our new home. But we are planning early because the extra money will pay for freedom of choice should they not get into the local state school or require additional tuition.

'Any money left will go towards their university fees.'