Scheme protects capital and profits
EDUCATION savings plans, especially life assurance ones, are a contentious issue with many parents, which is why ACC Bank has brought out a new deposit linked scheme that, protects both capital and profits.
The vast number of parents who have purchased education savings plans since the 1980s bought into life assurance based schemes which involved monthly premiums and the expectation that the investment fund would pay for the child's secondary or third level education, whenever that would be.
Parents were often quoted unrealistic projected returns (which many misinterpreted as actual growth rates) or values which even when achieved were whittled down to a fraction of the quoted figure by high set up charges and commissions. In most cases up to two years worth of contributions would have been lost to charges.
The life assurers have begun to repackage their standard, open ended savings plans by cutting costs and commissions and by allowing for more flexible contributions. But what they cannot promise is that either the unit linked fund itself or its overall growth will be absolutely guaranteed.
Instead, you must still take your chances that the investment markets will perform to the level projected in order that your financial target is met. (With profit savings plans are somewhat safer in, that they offer a minimum guaranteed sum assured and promise that once the annual growth rate of the fund is declared it can never be taken away.)
ACC Bank has taken another route - one already mapped out to a certain extent by An Post and its highly popular Instalment Savings Scheme and Saving Certificates.
According to Eileen Fitzgerald, ACC Marketing Services Manager, group test studies the bank under took with parents from all around the country showed that above all else "parents did not want to take any risks with the money they were prepared to set aside for their children's education." The bank's own proposal for a traditional, mainly equity based savings plan - which its designers predicted would probably produce better returns over similar periods, but included an element of risk, was rejected by the parents, many of whom "already had a negative experience of such plans."
What ACC has come up with is a regular savings plan, like the conventional insurance based ones, but with none of the risks and no commission, maintenance or management fees. The minimum £50 a month, paid by standing order, will attract a premium annual interest rate of 3.75 per cent with an option to switch some or all of the accumulated savings each year into a higher yield fixed term account. This account should return in the region of 6 per cent, the best rate paid by the Post Office for five year and nine month term Savings Certificates. (Normally, amounts of at least £5,000 are required for high yield fixed rate bank accounts.)
Contributions are arranged on a monthly basis, but there are no penalties for taking a contribution break and the nature of the account means that lump sums can also be made. "It came up at some of the group sessions that many grandparents are also interested in helping out with their grandchildren's education," explains Ms Fitzgerald, but may have been reluctant to commit themselves to a life assurance policy.
Being able to make lump sums into a savings account policy like this, without attracting any commissions "was seen as very attractive", she adds. There are no attached maintenance or management fees, but 27 per cent DIRT is applicable and unusually, there appears to be no Special Savings Account option.
An extra bonus and an incentive to get new customers is that for the next two years the bank will be offering four annual education bursaries, one worth £3,000 and three worth £1,000 each that will be open to all Education Investment Plan customers. (A nice touch would be to make the £3,000 bursary a permanent feature.)
"Since parents also admitted that they were quite baffled by all - that was involved in the long term planning of education costs, we have also produced a free guide," says Ms Fitzgerald.
It offers a simple method of calculating the costs for third level students who continue to live at home and those who move to a different city over say, four years, as well as a useful college expenses planner which uses this information to calculate the numbers of monthly savings required. The attraction for many parents will be that the totals that emerge reflect the real money that needs to be saved, not a projected fund growth that may or may not be realised.
Given that the growth potential of this product is restricted to the 3.5 per cent or 6 per cent per annum rates, parents ideally need to start saving when their children are very young. By ACC's own conservative estimate that at todays values it will cost in the region of £7,000 to put a young person still living at home through four years of college or £13,000 for a student living away from home.
Under the ACC plan for example, a parent would need to save the equivalent of £75 a month for seven years (or, £6,300) to yield £7,281 after tax.
ACC's free Guide to Education Costs is available from any ACC Bank branch or by contacting the bank's head office at Upper Hatch Street, Dublin 2, Tel. 1850 234 234.