Investing ahead for costs of third-level education

Education is an expensive business even though fees have been abolished. Many parents are still wisely thinking ahead to their young children's university years.

Family Money reader Mrs Mac writes: "I have three children under five years and receive £115.00 (€146) per month children's allowance. I want to invest this in some secure instrument for their future education. With interest rates so low I immediately thought of An Post but someone else suggested taking out some sort of life insurance/assurance."

At the moment, child benefit is £34.50 for the first and second child and £46.00 for a third child. It is payable up to age 19 if the child is in full-time education, attending a FAS Youthreach course or is physically or mentally disabled. Otherwise it is only payable up to the child's 16th birthday.

Although Mrs Mac's £115 may seem a small amount per month, it builds up quickly over time. If her children are aged two, three and four she should receive in excess of £20,000 over the next 16 years should allowance rates remain the same and the kids stay in school until age 19.

The Department of Social, Community and Family Affairs allows the option of depositing the child's allowance directly into a bank, building society or An Post savings account. However, the return on deposit and traditional savings accounts is barely beating inflation.

The managing director of BDO Simpson Xavier Financial Services, Mr Alan Flynn, believes there are better ways to invest the money. "I'm a big fan of endowment policies." In general, he believes someone in Mrs Mac's situation should look at two possibilities. "They may break it into three parts and select each child's 18th birthday and structure an endowment contract to run from now until that birthday. Endowment policies give a term and a bonus but you must go the full term to get the bonus."

The alternative, he says, is to do a PIP, or personal investment plan, with the combined children's allowances. This option gives the flexibility to cash in the funds when needed. He recommends Standard Life for the endowment and PIPs from either Friends First, Ark Life or Irish Life.

If possible, the parent should specify in their will that the payments will continue into the investment until the specified date. In some situations this arrangement may present legal problems with the will but it ensures that the children receive the full benefit of the investment.

Mr Flynn believes that if the parents don't have a life policy they should take it out with some of the children's allowance as it will guarantee they receive money if anything happens to the parents. These policies may be expensive and there may not be much left afterwards for investment purposes.

Mr Jeremy Walker of Financial Engineering Network, strongly believes the funds should be used to ensure that in the event of anything happening to someone like Mrs Mac that her children would be protected. A policy should be taken out in the name of the non-wage, or lower wage-earning spouse. This is because the main breadwinner usually already has protection policies in place. "If they become ill, a lump sum is provided to protect the ill parent and the children," he said.

After setting up the policy, they should consider "putting the remainder of the funds into a long-term savings plan on a nil commission basis which matures when the oldest is 21 or 18," he said. This should be invested in equities, not deposits because they won't even get the rate of inflation and equities have performed much better than any other investment over the long term he said. Again, it's unlikely there's a huge amount left once the protection policy is paid.

"If there's anything left to invest, put it into a regular premium savings plan on a monthly basis," he said. Mr Walker believes New Ireland has a good one. It's open-ended and customers are not asked to put a term down on the application form although it's usually about 10 years.