£150k but need for school fees

[BaublesBob]

Hello

Where would you look to put £150k which will be needed from 2027 to 2038 for school fees?

I'm maxed out for this year on ISAs but could keep it in a savings account and drip it into ISAs? But I worry that will be too low return

It feels too small a sum for an IFA.

For now stick it in an easy access saver account, until you decide what to do, that allows 3 withdrawals a year. High street banks have them in the 4% interest range. You could divide between 2 banks.

Remember that you will pay tax on any interest and if you are a higher rate tax payer 40-45% of any interest earned will go back to the inland revenue.

Have you considered paying fees in advance. A lot of private schools have arrangements where you can pay several years fees in advance and avoid the increase each yr. The fees increase can be anywhere between 3-5% possibly more over the next few years if the VAT impacts numbers and fees increase to cover the costs of falling pupil numbers.

Current interest rates are falling and you may find you save more paying in advance than you would earn in interest.

The only worry would be if the school goes out of business.

Can you save any more?

I would stick some in premium bonds and some in something like a global all cap S&S ISA for the amount you don’t need to touch for 5+ years.

I'm a financial adviser.... trust me there are no magic funds we can recommend that offer tax free, low risk high returns! FWIW an FA would first check you've got no outstanding expensive debt (ie credit card debt), and then ensure you've got a 3 month emergency fund. Then they'd look at protection needs - and only then would they look at your surplus £150k.

Prepaying as suggested by @Angrymum22 is a fabulous idea as it may help avoid VAT too. But there are risks from doing that if your DC don't like the school or have discipline issues.

You've got a long time horizon for some of that money, so investing part of it in a multi asset fund should be considered - and then drip feeding into your ISA each year. Cash you need in the next 5 years should be kept in low risk investments. Premium bonds are good as the winnings are tax free (and a bit of fun). You may get better and more predictable returns off a money market fund but those returns would be taxable income.

Unfortunately Fees in advance normally only allowed once your child has been accepted at the school and you’ve paid the deposit ( so now for dc starting that school in 2025 or earlier). It also doesn’t usually protect you against future fee rises- you will be asked to assume an annual rise- they will calculate total fees based on that for the period you want to prepay, and then apply a % discount. The money you prepay represents a pot that future fee invoices are drawn against. Most schools will agree to refund unspent funds if your dc leaves. Main risk is the school goes bust in which case you’d rank as an unsecured creditor.

I had a similar sum from inheritance and paid fees in advance for dd2 as the bursar offered a small but increasing discount for every subsequent year. Ask school for a calculation - eg year 1 was 2% discount, year 5 got up to 12% discount etc. it will differ from school to school.

this worked for us only because we had maxed out ISAs and we would be paying tax on savings interest, and we have a very cheap mortgage rate for the next three years. Our IFA thought he could get a better return on our money investing it, even accounting for tax, but I like the psychological assurance of having paid the fees.

fwiw we had to move dd1 under a cloud a few years ago and we got her fees in advance back no problem. The contract was very clear when you can get money back - but again check!!!

the VAT ship has sailed as the government has made very clear in the technical note that VAT will apply to prepayment made after 27 (think this was the date it was a July date) July 2024. There is NO chance you can avoid VAT by prepaying now before January as that has been anticipated in the consultation document and shut down. I prepaid earlier in the year so might be fine but I’m also psychologically prepared to pay VAT if the legislation eventually changes the timing of when vat is levied (ie to time of supply rather than time of invoice as it has always been to date).

Good point about being unsecured creditor : we also checked out that aspect and why we wouldn’t pay dd3 fees in advance as much smaller school and I wouldn’t take risk.

Pay that off your mortgage then use the excess from lower mortgage payments to pay the fees.

I can save more but a lot is tied up in other funds (kids pensions, uni fund etc) so around £500 a month extra on this. The mortgage is at a low rate and on a 10 year fix (then we're done) so I'm inclined to keep it.

The school we hope to use does allow payments in advance but you then have to meet the cost of the increase as it comes. There's no real saving. And no VAT avoidance as PP said.

Put some in premium bonds?

Yes premium Bonds a good shout. Open accounts for you, partner and dc can put up to £50k in each then drip feed into ISAs/pay fees directly from there . You can look up the effective average rate of return ( it’s like a low rate savings account) BUT winnings are tax free. It’s easy to move money in and out but it takes up to two months before you’re eligible for the prize draw so it’s not suitable to stash money in for just a few months

Two possibilities I can think of for savings outside of your ISA allowance, but will take a bit of calculating (these are not recommendations just ideas so do you own research).

1.Building a savings ladder with fixed rate savings bonds.
Each rung of the ladder represents an additional year for maturity, and savings would then be filtered into your ISA. There would still be a tax liability until you could shelter it, but it would it secure the current rates and have certainty on your returns.

So 1-year fixed rate savings bond - £20K (or £40K if there are two of you to filter into your individual ISA's). Current best rate 5.25 % p.a gross.
2- year fixed bond - £20 or £40K - Current best rate 4.85% p.a gross
3-year fixed bond - current best rate 4.60% pa gross.
and so on.

https://savingschampion.co.uk/best-buys/personal/fixed-rate-bond

Another possibility is to explore buying directly held gilts (not in a gilt fund).
Buying gilts on the secondary market might enable you to buy them at a discount and hold them to maturity. You know their face value in advance, so after fees you can work out your return. Although the dividend income on them is taxable, the capital gains on gilts is tax free. This option has proved quite popular for investors as a low risk, tax efficient option outside of an ISA. Buying gilts has become easier since some platforms, such as AJ Bell have recently started offering them online. It can take a bit of research to figure out how it might be of benefit, as you're looking for capital gain rather than interest or dividends. It's worth investigating.

https://www.hl.co.uk/news/what-investors-need-to-know-about-buying-government-bonds-gilts-in-2024

https://www.ajbell.co.uk/our-services/investment-options/bonds/gilts

£50k in premium bonds each for you, your partner and your child and then top up ISAs each year

If it was me I’d put it in my mortgage offset account and therefore pay the mortgage down quicker.

I would have 5 years worth in premium bonds and max out tax free savings then put the rest in a GIA or similar so you have a few years to ride out the stock market and bed and ISA every year or whatever it’s called now

You might earn enough to just skim off the growth by then and leave the capital for their uni funds or house deposits?

£150k isn't 5 years worth of fees taking into account annual increases, even without VAT.

There won't be any capital left and she'll need to keep adding to the pot.

Current fees are £18k. Then of course VAT and annual increases. 3 school year age gap between my DC so from 2025 to 2028 I'll have one fee, 2028 to 2031 two fees, 2031 to 2034 one fee.

So £150k is a big chunk of it. Probably close to 50%

I'm not expecting anything left.

Yes, £18k now plus vat plus annual increases will proably be £40k by 2034.

Never said it was

I’m paying school fees via part income part S&S ISAs (appreciate tax issues for OP) and the actual original capital hasn’t been touched. Sorry misread thought you were starting in 2027

My years have gone awry. I don't need my lump sum to cover the first couple of years. So suspect I was thinking of that in my OP.

Sorry to confuse. My error not your reading!

Can you pay out of income until 28 when the first child goes? It feels like it would be that period that is the most painful re double fees.

If you can leave it until 28, I’d be tempted to invest a portion and do the fixed rate saving tiering another poster suggested. If you run the numbers re vat and inflation to 2034 your £18k a year gets to a scary number so I’d want to make sure there is some opportunity for investment growth as savings are unlikely to keep pace with private school fee inflation.