Our recent Real Cost of Childcare report contains plenty of eye-opening findings. But perhaps the most sobering is that the cost of raising children in the UK is now high enough to put significant numbers of people off actually having any more. For a full copy of the report, please get in touch with an Investment Manager. Meanwhile, here is a summary of its main findings and a quick look at some of the ways that young parents and their families can reduce what is clearly becoming a huge financial burden.
A bigger problem than we think
Most people know that raising children in this country is expensive, particularly when compared to our peers in many European countries. Nonetheless, it seems that most of us are not aware of the true figures. Our latest report, prepared by the Centre for Economic and Business Research (Cebr), surveyed 2000 working parents across the UK with children aged five and under. When asked what they estimated the total cost of raising a child to the age of 18 might be, the average response came out at just over £130,000. Yet, according to the NatWest Cost of Raising a Child calculator, the correct answer is more like £200,000. And bear in mind this number is a national average – Londoners can expect a far higher figure – and it assumes the child is State educated. For a private education, the number rockets (see below).
Moreover, the childcare costs absorbed by most UK families are way above childcare costs in other developed countries. In 2016, for example, the OECD (“Society at a Glance”) estimated that UK families spend around 33% of their household income on childcare, compared to under 10% in France and Germany. We are also well above the OECD average of just under 13% and all of our Commonwealth peers. So, every penny that a family can claim in State support is a penny worth having.
Fortunately, there are ways that young parents can reduce the overall cost to them in the early years and also some further ways that older generations can help when it comes to raising and educating children.
State support – every little helps
Worryingly, our report reveals that only half of respondents had heard of the latest Tax-Free Childcare scheme, which started in April 2017. Meanwhile only one third are making use of the existing 15 hours of free childcare available to all parents once a child reaches the age of 3, which rose to 30 hours for some parents from September 2017. Here is an overview of both.
Tax-Free Childcare Scheme
This new scheme allows eligible families, with children aged under 12, to get 20% of their childcare costs paid by the government. In a nutshell, every 80p put into an account can receive a 20p top up from the State, capped at a maximum of £2,000 per child per year. Available to meet the cost of a wide variety of childcare options, including nannies, nurseries, playgroups and breakfast clubs, the scheme is on offer to working parents who earn at least £120 per week and a maximum of £100,000 gross per year. So far so good and yet our data suggests that only 47% of those surveyed have heard of the scheme and only 20% of these 47% have signed up for it.
The survey goes on to suggest that 71% of families nationally receive help from other family members, which may be a key reason why they do not sign up for the scheme. Other families are electing to stay with Childcare Vouchers, which you cannot continue to claim past April 2018 whilst joining the scheme at the same time.
This scheme works on a salary sacrifice basis and it is offered by most employers (92%, according to our survey). It allows an employee to give up a maximum of £243 per month of their gross salary in exchange for vouchers that can be used at most childcare providers, such as nurseries. Salary sacrifice in effect gives an employee a gross benefit at its net (after tax and National Insurance) cost to them. These vouchers can therefore save each working parents up to just over £930 per year in basic-rate tax and £630 in higher-rate tax.
Useful though this scheme is, as our Cost of Childcare report reveals, some parents will be better off switching to the new scheme and anyone who is self-employed should definitely be looking at it as they don’t qualify for Childcare Vouchers.
Free Childcare for 3-4 year olds
This is a universal benefit to be used at an approved childcare provider, such as a nursery or pre-school class. Under this scheme, all children receive 570 free hours per year, usually taken as 15 hours per week for 38 weeks of the year. Yet, our survey revealed that only around one third of parents make use of this scheme. That is because some have other arrangements in place, such as family help, however, a sizeable minority (19%) have been put off by the complexities of the application process.
The good news for those that persist with this process, is that this scheme has now been extended to 30 hours per week for eligible parents (to qualify, there are some conditions, prime amongst which is that neither parent should be earning more than £100,000 per year each). Despite some adverse pre-launch commentary from nurseries that the government contribution would not allow them to offer 30 hours free, 85% of the survey’s respondents confirmed that their local nursery has been able, so far, to fund the extra hours without charging parents. Perhaps most importantly, our report suggests that taking the full 30 hours could be worth, on average, around £6,400 to a typical couple, for every year that they qualify.
Paying for School
Once the early years have been successfully navigated, many parents then face the challenge of funding school fees should they wish to educate their children privately. This is another, bigger challenge. Private school fees have been rising at well above the general rate of inflation for some years. Based on our last Cebr report, the average cost of a day-school education over a 14-year period is now heading for around £300,000, meanwhile the cost for a child that boards from the age of 13 is getting close to £500,000. Worse , these estimates exclude “extras” such as equipment and trips, for which the Cebr suggests you may be adding a further £3,000 per year per child. So what to do? Here are just four suggestions;
- Since both the future timing and potential amount of school fees can be predicted with reasonable certainty, it is vital to plan ahead – devise an appropriate investment solution that is structured to balance your objectives, costs and the need to be tax-efficient
- Save as much as you can, early and often, towards future school fees to harness the long-term power of compounding
- Give careful consideration to when you want private education to start. This is a highly personal decision that has to balance several factors. From a purely financial perspective, the Cebr estimate that if a child enters private education from the age of 11 (secondary school), rather than 5 (primary school), a family could save up to £100,000. Further, whilst moving a child from the State system into a Private School later is usually fairly straightforward, taking the opposite route, if it becomes apparent later that the fees are unaffordable, is often much less so
- If you can afford to, look at any options to pay in advance. Some private schools will let parents pay a smaller upfront fee compared to paying in installments. This needs to be balanced against your access to capital and the potential investment returns you may forgo.
This article originally appeared in the Winter edition of our client magazine Confidant. Should you wish to read the full magazine, please contact us at firstname.lastname@example.org to receive the digital version.
This article does not reflect views of Killik & Co, so please do not interpret it as a recommendation for your personal investments. If something has piqued your interest and you would like to find out more or discuss what investments might be suitable for you, please contact one of our Investment Managers on 020 7337 0777.
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