Drip Feed an Investment to Pay for University Fees

Students will now graduate university with £53,000 worth of debt, so parents looking to help with fees should start drip feeding an investment at birth

Emma Wall 6 April, 2016 | 12:20PM
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This article is part of our Guide to Maximising Your Pension, helping investors build up the maximum possible pension pot – and turn it into the maximum possible retirement income.

For the parents of young adults it is too late to plan how to finance their higher education. Recent findings reveal that the average student will emerge from three years of university with debts of £53,000. 

Tuition fees, accommodation and living costs mount up over three years - and leaving young professionals facing working life with the burden of significant debts.

What’s more, according to research by the Association of Investment Companies (AIC), both students and parents underestimate the level of debt university students can accrue – with parents estimating an average of just £18,333.

In order to help lessen the financial burden on their off-spring, savvy parents know that forward planning is needed if they are to contribute to university costs – ideally with a savings plan from birth.

Figures from AIC show the most manageable way of growing a large investment pot over an 18 year period is to drip feed a fund and in order to make the most of these gains, it is best to use a tax-efficient savings plan.

Junior ISAs are the perfect vehicle for this sort of investment as the capital cannot be accessed until the child is 18, forcing you to adopt a long term investment horizon – and a greater level of risk for the potential upside. 

A monthly deposit of £50 into an equity ISA from birth to age 18 amounts to a total investment £10,800. 

Past performance figures show that if you had drip fed this investment into the average investment trust over the past 18 years the pot would have grown to £24,835, less 3.5% for fees.  A lump sum investment of £1,000 at birth would have only grown to £4,180.

A monthly payment plan is the most manageable way to build up a large investment, however should parents have a significant sum to invest, figures show that an initial investment of £10,800 in the average investment trust 18 years ago would now be worth £45,115 net of fees.

Take Advantage of Your Child’s Lifetime ISA Allowance

Thanks to the new Lifetime ISA these returns could be further boosted by the £1,000 gift from the government. From next year, April 2017, those aged less than 40 will be able to take out a Lifetime ISA. Qualifying savers can put up to £4,000 a year into this new ISA, and for every £4 they add, the Government will put in a further £1 – boosting their pot by up to £1,000 a year.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Emma Wall  is former Senior International Editor for Morningstar