University funds – 3 vital reasons yours may not be big enough when it’s needed

University funds – 3 vital reasons yours may not be big enough when it’s needed

According to government statistics, more than 210,000 students in England accepted places at a university in 2021. Of those, 192,000 confirmed places at their university of first choice.

After another demanding year for students thanks to Covid, it was very welcome news. What may not be as welcome is recent data by the Association of Investment Companies (AIC), which reveals that many parents underestimate how much debt their child will leave university with.

According to the study, parents believe it will be around £25,000, when in fact the likely amount is closer to £45,000.

Of course, this debt could be reduced if the student is getting financial help from family. As parents and grandparents are often keen to provide financial support, many put money aside that can be accessed when a child starts studying after school.

If you’re one of them, the chances are your “university fund” could be in a tax-efficient Junior ISA (JISA), something you’ve probably been contributing to as your child has grown up. Sadly, many of these JISAs could be at risk of failing to provide the level of financial support initially intended because they’re held in cash.

Worst still, cash accounts could also lose value in real terms. Read on to discover why building a university fund in a Cash JISA could cost you dear, and why a Stocks and Shares JISA might be a better option.

Two-thirds of parents want to help with university costs

According to AIC, 66% of parents plan to help their children with university costs. Many could use JISAs as they are free of both Income Tax when you draw money from them, and Capital Gains Tax on any growth.

If this incudes you, you’ll already know that, in 2021/22, the total JISA allowance is £9,000, which means a substantial sum could be saved if you start when your child is young.

While it could be that a JISA is right for you, it’s also worth considering the following points, as it could potentially stop your university fund devaluing in real terms.

1. Most parents opt for a Cash JISA when building a university fund

According to AIC, nearly 6 out of 10 parents put university funds into Cash JISAs. One reason for this could be that these tax-efficient children’s accounts can offer more generous rates than adult ISAs.

In August 2021, the Guardian reported that the Loughborough Building Society’s Cash JISA offered 2.5% in interest. The month before, This is Money revealed the average JISA paid 1.67% in interest.

This is Money also explains that if you invested £250 a month (£3,000 a year) into a Cash JISA for 16 years, based on the average interest rate of 1.67%, it would be worth £54,981. While that’s nearly £7,000 more than the £48,000 you would have contributed, it doesn’t tell the whole story.

2. Inflation could result in your Cash JISA losing value in real terms

What’s important about the example above is that it does not consider inflation. This is the average increase in the price of goods and services, and has the potential to devalue your money in real terms.

The higher the inflation rate, the less your £1 buys you in the future. This is Money explains that if an average inflation rate of 2.5% inflation is assumed on the above example, your £54,981 would have the equivalent spending power of £36,668 today.

What makes this particularly sobering is data from the Office for National Statistics, which shows UK inflation stood at 3.2% in August. This means that if your JISA paid the average 1.67% interest rate, your money would still lose around half its value in real terms.

3. A Stocks and Shares JISA might inflation-proof your university fund

While Stocks and Shares JISAs offer the same tax advantages as their cash equivalents, your money is put into investments that could offer greater long-term potential growth.

Not only could this help inflation-proof your university fund over the long-term, but it may also help boost its growth. This might mean you can pay a higher proportion of your child or grandchild’s university costs.

The graph below shows the performance of the FTSE 100 index over the last 16 years, which, even with downturns along the way, increased significantly. Despite this, AIC’s research found that just 31% of parents place their university funds into a Stocks and Shares JISA.

Source: Trustnet

While a Stocks and Shares JISA might be a shrewd move, always speak to a financial planner to ensure it’s right for you.

They will explain the levels of risk involved, as well as the potential rewards, thus giving you peace of mind that any investment you make could help you meet your goals. Investing should never be entered into lightly, and typically should be a long-term venture.

Remember: previous performance does not guarantee future performance and you may end up with less money than you invested, depending on when you access your money.

Get in touch

If you are considering creating a university fund for your child and would like to discuss investment options, please contact us on 0800 434 6337.

Please note:

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and your financial circumstances.