Jill Kerby

SAVING AND INVESTING – DEFENSIVELY - SHOULD ENSURE THOSE LONG TERM EDUCATION FEES ARE MET

The sight of the new junior infant classes at this time of year lightens all our hearts at this time of year, even if, the background, their (sometimes) tearful parents may be grumbling about the cost of uniforms, books and the ‘voluntary’ contributions they are expected to make to the school.

The cost of educating a child from junior infants to a third level degree can amounts to many tens of thousands of euro, especially if you decide to go the private education route and then, depending on whether or not you end up paying third level fees and living away expenses.

Primary school parents I know say they factor in about €500 per primary child per year and up to €1,000 a year (mainly in years 1, 3, 5) for all the costs associated with secondary attendance.  Those parents with two primary going and one secondary student will therefore need to find at least €2,000 this new school year.

With university registration fees alone costing €2,000 this year, when books, transport, food and entertainment are added (and living costs for students attending colleges away from home), woe-be-tied the parent that hasn’t planned well ahead how they are going to meet the total cost of their children’s third level education.

The most popular source of finance for parents of children up to age 18 is the universal, tax-free child benefit payment. (That may change yet.)  For three school going children under 18 this amounts to €447 per month or €5,364 per annum, which should meet the costs of uniforms, books and voluntary contributions. 

For parents who can afford to bank the monthly €140 benefit from when their child is born, the three or four years of interest bearing benefits could theoretically produce a fund of €7,130 per child (earning 3% net) by the time their son or daughter starts junior infants.

Most financial advisors I’ve spoken to about education costs, who may have once favoured investing lump sums, are currently leaning towards deposits and other very defensive saving options, mainly because of this current period of volatility, currency fluctuation and economic uncertainty in the western world.

The well known advisor Eddie Hobbs says he is expecting a pick-up of inflation once the next bout of quantitative easing – money printing by central banks to ease their debt burdens – occurs. Because cash holdings will be vulnerable and spending power diminished, he suggests that parents consider taking some of their education fund lump sum and buy Bank of Ireland’s 5 year inflation deposit bond.  The rest they should continue to save in solvent, highest yielding deposit accounts.

Liam Ferguson, of Ferguson Associates favours the high yielding EBS Family Savings Accounts which offers a 5% first year and 4% second year return.  “I am less inclined to recommend investment funds – the charges are still too high in many cases, especially when current 3% inflation in taken into account”, but given the state of wider economic uncertainty, he also recommends that parents who can afford to, consider diversifying even out of cash.

“The monthly Goldcore.com  Goldsaver account, which allows you to save as little as €150 a month in gold, is worth looking at,” he says. The money is converted every month for the year into Perth Mint Gold Certificates.

Next, where a lender will allow homeowners to draw down accelerated mortgage payments in the future - “KBC certainly allows it” – this means that the parent that is willing to overpay their monthy mortgage repayment is “earning” a guaranteed tax-free, charges-free equivalent return the equivalent of the interest they are paying on the loan.  All the overpayment plus the interest can be drawn down in the future to pay for education fees, in the knowledge, says Ferguson that the mortgage will still be cleared on schedule. (Check with your bank to see if they permit equity drawdown on overpayments.)

Impartial.ie advisor Vincent Digby has been a supporter of absolute return funds, but he is also leaning towards very defensive investment options like cash and fixed income for all his clients at the moment. Where investment funds are being consideration he suggests keeping costs as low as possible by using the services of a fee-based advisor only, and with frequent reviews of the asset classes under management.

For Michael Kiernan of the on-line advisory, www.myadviser.ie “The savings agenda is still deposit focused as rates are quite high.  That said, my own medium to higher risk appetite is for absolute return funds.  I would also probably only use long-only equity [stocks and shares] funds when I thought the upside potential was worth the risk; this is especially the case once a sizable lump sum had been saved.” (Absolute return strategy funds include the likes of Standard Life’s GARS fund, Aviva’s Blackrock European Fund and the Friends First Insight Currency Fund.)

Parents who start saving soon enough, should have enough time to make up for any investment losses they may experience, all the advisors agree. 

But external conditions are so uncertain at the moment, with huge swings in returns, that they should be aiming for safety first right now.  The ‘buy and hold’ investment strategy has not proven particularly rewarding over the past decade and deposits, as well as investments need to be carefully and regularly reviewed, both to protect the capital and to squeeze out some growth.