The pros and cons of downsizing

Recent figures from the Institute of Fiscal Studies suggest that the average total debt incurred by today’s university students over the duration of their studies amounts to £51,000. The new figure comes as those in higher education see the interest rate on student loans rise to 6.1% in September, despite the Bank of England base rate remaining at its lowest ever figure of just 0.25%. The rise means that students will now typically have mounted up £5,800 of interest by the time they graduate. Total student debt in the UK has now risen to £100 billion, a figure higher than the nation’s total credit card debt.

The rising cost of higher education perhaps makes it unsurprising that 40% of parents are now beginning to save towards future university costs before their children have even been born, with one in five hoping to have saved £2,000 by the time the baby arrives. Frustratingly, however, around two thirds of those who are saving are doing so by simply placing the funds in an ordinary savings account, meaning their money is earning them very little in interest.

An alternative option to consider is a Junior ISA (JISA) in the child’s name, which they can then access when they turn 18. The account currently allows £4,128 to be saved every year, and the best rate market rate for a cash JISA offers 3.25%. Saving the maximum amount at that rate for ten years would result in a nest egg of £49,427 tax free to cover university fees with plenty left over for other expenses.

Whilst a cash JISA offers dependability, a stocks and shares JISA is also worth considering as the potential reward on your investment can be higher. Both types of JISA can be opened at the same time with the allowance shared between them, so spreading your savings between the two can pay off in the long run.

Using your pension to save towards your child’s university education is also an option, thanks to the pension freedoms of recent years. With the ability to take a lump sum to put towards fees and other costs when you turn 55, pensions offer a tax-efficient way of putting away for both your child’s future and your own. This is an option which needs careful planning, however, as you’ll need to make sure you have enough for your retirement before paying for your child’s education.

For those able to do so, it may also be worth speaking to your own parents about helping towards their grandchildren’s university costs. Rather than leaving money to a grandchild in their will, a grandparent might consider gifting towards fees and other expenses or placing the money in a trust, reducing their inheritance tax liability and allowing their grandchild to benefit from their legacy when they really need it.

A new report has revealed that the UK’s working adult population has missed out on a staggering £94 billion over the past five years through failing to invest in the stock market and holding their money in savings accounts. The figure comes from public policy think tank, The Social Market Foundation, which has also found that more than £200 billion worth of cash is being held by savers above the recommended three months’ worth of income or ‘rainy day’ level of savings that should be kept available.

The think tank has urged the government to do more to inform and encourage savers about diversifying their savings and investments, as the figures suggest many are devaluing the money they’ve worked hard to put away, thanks to high inflation and low interest rates. More worryingly, the report reveals that more than 14 million working adults in the UK are not saving whatsoever and that more than 26 million have inadequate pension savings.

Had UK savers invested in peer-to-peer loans instead of the stock market or simply left the money sitting in a savings account, the returns they would have seen could have amounted to £40 billion. As such, the report recommends the government markets up to 25% of both its Future Britain Funds and National Productivity Investment Funds to the public. This would not only give savers the opportunity to grow their savings, but would also allow them to invest in the country’s future. This could lead to investment of at least £30 billion in these ‘Britannia bonds’ in the next five years, which would provide greater funding for infrastructure.

Another recommendation from the report suggests that the government give £1,500 to every 15-year-old from 2020, funded by money saved by reducing the ISA allowance. With the help of real life financial education, the teenagers would then use the money to invest in a range of asset classes. This would not only help young people to learn the benefits of wise saving and investment practices, but would also ensure they have at least some financial assets as they head towards life outside secondary education.