Matthews IFA Ltd
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Use the power of compound interest!

This autumn's increase in tuition fees, combined with rising accommodation and living costs have pushed the cost of a three-year university education to around £51,000.
Those born this year could face costs of around £100,000 once inflation is considered.

Most students fund their degree, at least in part, by debt. Unfortunately many underestimate how long they will need to make repayments for and how much those repayments could be. Paying off a debt of £100,000 would take 30 years if the interest rate was 6% and the debtor paid £600 per month, meaning a total cost of £216,000.

A debt of this level is likely to impact their ability to save for a deposit for their first home or to build a cash cushion.

Why not use compound returns to the advantage of your children or grandchildren, rather than let compound interest on such a debt burden work against them?

As an example, save £250 a month into a Junior ISA from the birth of your child or grandchild and at age 18 they could have a lump sum of £95,240 to put toward university costs (assuming a 6% return after charges). Used in this way Junior ISAs could be a superb way to build a fund for university. Please note the figure calculated is just a projection, the actual amount you would receive depends on the investment returns achieved. All stock market investments go down in value as well as up so you could get back less than you invest.

This lump sum is achieved faster than the debt described above, and so the debt could be paid off for a much smaller monthly sum.

Junior ISAs are available to the majority of children who don't have a Child Trust Fund. Like the adult ISA there is no further tax to pay on either the income or gains from a Junior ISA.

Please note taxes can change and the benefits to your child will depend on their circumstances.

Anyone can fund a Junior ISA - parents, grandparents, friends and relatives up to the annual contribution limit of £3,600 a year. Funds are ring-fenced for the child's future, so no withdrawals are permitted until age 18, when the account becomes an 'adult' ISA and the account holder has full access to their capital.

The only drawback of a Junior ISA is that the fund passes into the direct control of the child at age 18, who may then decide to use it for something other than university fees (a new car is favourite).

If you are concerned about this you could always save in your own name, but then you would be using up your own ISA allowance.

Either way, please remember that those who understand the power of compound interest, earn it, those who don't, pay it! So please make sure that you explain it well to your children or grand children, and get them into the habit of saving, early!




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