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Oracle insight - Funding future education expenses

Funding a child through university is a major financial commitment for any parent, but have your clients considered how they will pay for tuition fees when the time comes?

Oracle, our new single premium investment bond, can be used to save for future education fees. With the minimum premium starting at $32,000 (or currency equivalent), it is a flexible choice for those with a lower amount to invest, to start saving for their child’s future.


This case study outlines the financial implications of sending a child to an elite UK university, with a little bonus twist to boot!


The current landscape

In 2011/12 the potential cost for a first year overseas undergraduate to attend one of the UK’s elite universities is in the region of $47,500. If the fees remained static throughout the course, the total cost of tuition fees over 4 years could be around $190,000.


That figure is based on today’s fees, but what about in 15 years time? It is probably fair to assume that fees will continue to increase annually.


Assuming that $47,500 increases annually by 5% for 15 years, the total fees payable to send a child (aged 18) to an elite UK university may be nearer $423,000!


There are many planning opportunities available to your clients (for example regular savings), but here we will look at a single lump sum investment.


Oracle Gramophone

The scenario

John and Lisa, UK expats currently living in the UAE, require $423,000 to fund university fees when their daughter, Alicia, turns 18 (15 years from now).


Thanks to existing savings and a recent inheritance, they have $200,000 to invest. After taking advice, they invest this money into an Oracle policy. They’re particularly impressed by the scope of Oracle’s fund range, with access to over 120 quality funds with no initial charges and no switching fees.


Their IFA also pointed out that unlike a portfolio bond, there were no custodian fees, and no mirror funds that might impact on potential performance.


John and Lisa’s IFA explains that an Oracle policy can be segmented into a number of sub-policies. It is suggested they make use of the 100 sub-policy maximum, as this could provide tax benefits to them in the future, especially if they are considering returning to the UK.


For calculation purposes, we assume the policy value will increase annually by 7%.


’15 years later’...

Alicia, now 18 and a top performer in her class, has been accepted to an elite UK university. The value of her parents’ Oracle policy is $472,232. This means that each subpolicy is worth $4,722.32.


To fund the first year’s tuition fees of $98,000, Alicia’s parents surrender 21 sub-policies.


At age 19, the policy is now worth $396,381. Therefore each sub-policy is worth $5,017.48 (79 remaining after the previous surrender). $103,000 is required to fund the second year’s fees, so a further 21 sub-policies are surrendered.


Now aged 20, Alicia is entering her third year. The policy is worth $309,202 – each sub-policy is now worth $5,331.07. To fund the third year’s fees – $108,000 – a further 21 sub-policies must be surrendered. There are now 37 sub-policies left.


Aged 21 and entering her final year, the Oracle policy is now worth $209,576 and each remaining sub-policy, $5,664,22. Funding the final year’s fees will cost $114,000 so John and Lisa surrender 21 sub-polices.


Alicia graduates with 1st class honours, but...

John and Lisa discover their daughter wants to stay in the UK, as a job opportunity with a large multi-national company has presented itself. She would also like to get onto the property ladder sooner rather than later, but she may have to rent before something suitable becomes available to buy.


Alicia’s parents decide they want to pass on the remaining value of the Oracle policy to her, but they are concerned that surrendering the policy and transferring the proceeds will result in the monies being subject to UK income tax.


Their IFA explains that it may be more effective to assign the policy to Alicia at this stage. Since the policy has been outside the UK for 19 years, the tax deferred withdrawals of 5% per year of the premium paid, available to UK resident offshore bond holders, would become available to her. This would be calculated as:


$100 (5% of each sub-policy at the beginning of the policy)

x 16 remaining sub-policies

x 19 years


Therefore she could take up to $30,400 from the policy in one lump sum without a liability to UK income tax. She could also take smaller amounts, perhaps to help with any rental expenses.


Alternatively the monies in the bond could be used to help fund the deposit on a new home. Alicia could make use of sub-policy surrenders to help fund this as tax efficiently as possible, but could be liable for tax on any gains depending on the amounts involved.


In conclusion

Oracle could be a useful planning tool when considering the funding of future university fees from a lump sum investment. It may also be useful for extended planning beyond university, subject to the specific tax regimes affecting your clients at the relevant time.


Not all clients have the ability to invest a lump sum with the view to funding university fees. Where that is the case, they may still be able to consider using a regular premium savings product, like Quantum, instead. We have recently produced two new sales aids for Quantum looking at how regular savings could pay for university fees.


To find out more, please visit our online IFA centre, the Oracle or Quantum microsites, or contact your International Sales Manager.