Reader Q: What’s the best way to invest for school fees?

 Reader Question:

Hi, I am selling our family home and downsizing to release equity to pay for school fees. I hope to come away with £150-200k cash. I need to pay 2 sets of school fees. What is the best way to do this? Pay the school in a lump sum for the next 4 years or find an investment plan and pay fees annually or quarterly? Presumably I will pay tax on any interest earned.

 

My response:

Usually when people are looking to invest for school fees the timeframes involved are long term. As such they are able to take on investment risk in pursuit of investment returns in excess of that available on cash. With increased investment risk comes increased risk of a loss of capital. But this is less of an issue for someone with a long term investment timeframe (say 10 yrs before they need access to the money). In this instance if say a stock market linked investment fell in value then there may be time for it to recover before they need to pay school fees from it.

Based on the information you've provided it would seem that the £150-£200k is all earmarked for school fees which need to be paid in the next 4 years. As such you need to draw down on the capital sum, rather than pay school fees out of income that that capital could generate.

As a general rule of thumb if your investment timeframe is less than 5 years (i.e. the period of time before you need to access the money) then you should probably leave the money on deposit, as you can't afford a loss of capital.

If you hold money on deposit look for the best savings rates, making sure that there are no penalties for withdrawals if you opt for a term based account to secure a higher rate of interest. But do read my article 'the dangers of chasing the best savings rates'. Also don't forget to use yours and your spouse's cash ISA allowances (£5,640 each for the 2012/13 tax year).

With regard to tax, you wouldn't be taxed on the money made from downsizing but you would on any investment income or gains. But this can be mitigated. In the case of cash deposits then using your cash ISA allowance is a start, as any interest earned is tax free. But beyond this you will be taxed on any interest at your marginal income tax rate. But if you have a non-working spouse, who doesn't pay any tax, then placing savings accounts in her name can ensure that you pay as little tax as possible (and maybe none) on any interest earned.

Also if you are going to hold large sums of money on deposit then you may want to spread the money around different institutions to ensure that it is protected under the Financial Services Compensation Scheme should the banks go bust. I explain this in detail here.

As for whether you would be better off paying all the fees upfront or in installments this depends on whether the school offer you a discount. If not then you may as well earn the interest on the money for as long as you can and pay in installments.

Obviously this is quite a life changing event (what with downsizing) and funding school fees so I would chat with a financial adviser to make sure you have explored all your options, in context of your wider personal and financial circumstances. If you don't already have one then you can contact one by clicking the contact button below.

I hope that helps

Damien

Money to the Masses

Website: www.moneytothemasses.com

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