My wife and I have sold two buy-to-let properties and have £250,000 in cash to pay for the private secondary school fees of our daughters aged 11 and 9. What can we do to maximise the growth of this money and minimise the risk?
We know banks are not paying much interest, but the range of options seems vast. Stocks and shares Isas? Savings accounts? Bonds? Funds?
We need access to pay fees of roughly £15,000 a year for the next two years, then £30,000 a year for the five years after that and then £15,000 for the following two.
Martin Bamford, managing director at Informed Choice, the financial planning firm, says a good starting point for any investment decision is whether investment risk is really needed to achieve your goals. To calculate this, we can look at the difference between the available cash of £250,000 and the total cost of school fees over the next nine years.
I would suggest factoring in school fees inflation of 3.5 per cent a year, which is typical in our experience. This calculation results in total fees payable of £242,000. With £250,000 of capital available today, you could keep this cash in a deposit account and take no risk with the money, but still achieve your goals.
Rather than leave the money in an instant access cash account, it could be spread across different term deposits to maximise the interest received. You can get about 1.1 per cent interest in an easy access savings account compared with around 2 per cent from a one-year fixed term account, or 2.25 per cent from a three-year fixed term account.
Reasons for investing part of the capital, instead of leaving it in cash, would include the prospect for higher returns and protection from inflation. Money held in cash is currently eroded in real terms by the combination of low interest rates and rising price inflation. Over the next nine years, the buying power of the £250,000 could be worth nearly 20 per cent less, based on the current gap between interest rates and price inflation.
To maximise returns and minimise risk, you would need to hold a well-diversified portfolio across the major investment types; UK and international equities, fixed income and commercial property. Spreading the money across these different investment assets is the best way to minimise risk and volatility, without damaging the potential for good returns.
In the current economic environment, I would recommend holding at least three years of school fees in easily accessible cash, with the balance of the cash invested. The investment portfolio should be rebalanced each year, with the cash holdings replenished.
More from Your Questions
Making use of your Individual Savings Account (Isa) allowances of £20,000 each per tax year is a good way to minimise the tax paid on this money. Unless you have experience managing a portfolio of self-selected stocks and bonds, using managed funds could be a good idea and will also save time.
But before making a decision on savings or investments, speak to the school about whether it offers an option for advance funding. This is often called a “composition fee scheme” and can result in savings from the usual fees, or at least protection from future fee inflation.
Ben Yearsley, director of Shore Financial Planning, says don’t worry — you have enough capital already from your buy-to-let profit to cover the school fees, even allowing for some inflation. However, it would be great to have some capital left at the end, perhaps to help your children with university costs. Therefore, a portion does have to be invested and hopefully to enable a pot to be left in eight or nine years.
You could set aside £60,000 of the £250,000 to cover the first three years of school fees. Three years is too short a timeframe to suggest equity investment and therefore this should be left as cash. To maximise returns, you should consider placing this in one- and two-year savings bonds to eke out a slightly better return. Don’t forget every basic-rate taxpayer gets an annual tax-free savings allowance of £1,000 (falling to £500 for higher rate taxpayers, and nil for additional rate) so depending on your circumstances, some of this interest should be tax free.
You could also consider premium bonds (the top limit per person is now £50,000) or other NS&I products, for example, the new guaranteed growth bond paying 2.2 per cent for three years.
Another way of reducing risk is through phased investment which means you choose the investment portfolio today, but phase the investment in over the next six months. This doesn’t reduce the risk in the portfolio, but it does reduce the timing risk resulting from stock market volatility. However you need to be disciplined and ensure that even if the market falls, which it probably will, you still invest your set monthly amount.
Firstly, use your Isa allowance to make your investments tax efficient — no further tax on dividends and all growth is tax free too. The annual allowance is a generous £20,000 per person, so £40,000 between a couple can be invested immediately and (assuming the rules don’t change) another £40,000 next April and for each tax year thereafter.
You have said you want to maximise growth, therefore I’m going to suggest a fairly aggressive portfolio with no bonds and the majority of the £190,000 invested outside the UK. As and when money is needed for school fees, regular amounts can be withdrawn, either via income or by encashing units — don’t forget that dividends are taxed much more highly now than capital. Capital gains tax is 20 per cent for higher rate taxpayers, dividend tax could be as high as 38.1 per cent and income tax is 45 per cent.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
● Do you have a tricky financial dilemma that you’d like FT Money’s team of professional experts to look into? Email your problem in confidence to email@example.com