As children go back to school, many parents’ thoughts will have turned to the soaring cost of a private education.

With school fees having risen 41 per cent in the past five years, ahead of earnings, it is becoming harder to fund fees out of everyday income, and parents are increasingly unlocking their pensions or tapping the equity in their homes.

The average annual cost of sending a child to a private day school is £6,655, according to the Independent Schools Council, but it can be as much as £20,000. The cost of boarding is even higher at an average of £6,712 a term — £20,136 a year. A survey carried out by The Sunday Times found that Tonbridge School in Kent was charging the highest fees this year, at £26,826.

Parents whose children have just started at private school at the age of five can expect to spend £200,000 in fees over the next 14 years, according to research from AWD Chase de Vere, an adviser. This assumes fees rise by 5.9 per cent each year.

Even those who wait and send their children to private school for their secondary education will fork out an average of £136,000. We have 10 tips on covering the cost as effectively as possible.

1 Start building a war chest now

Advisers generally recommend you start saving for your child’s education soon after they are born, giving you the maximum time to build an investment pot.

If you have recently had a child and think you may send him or her to private school at the age of 11, you need to save £415 a month, according to AWD Chase De Vere. This assumes your savings grow by 6% after charges, and that you stop investing when your son or daughter reaches 11, when the money starts to go towards the fees.

Many parents will balk at that amount, but they could divert what they have been paying for childcare into a savings account.

The average cost of sending a child to nursery full time is £7,900 a year, but it can be as much as £19,000, according to the Daycare Trust — not much less than private-school fees.

If you leave it late to start saving and have less than five years before the money is needed, Philippa Gee at Torquil Clark, an adviser, suggests keeping it in cash. You can invest up to £3,000 a year in a cash Isa. National Savings & Investments (NS&I) has the best rate at 6.35 per cent.

If you have longer than five years, consider equities as they should produce higher returns over the long term. Gee suggests splitting the amount you save each month between three funds. She would put a third into a UK equity income fund such as Psigma Income or F&C Growth & Income, a third into a more aggressive UK fund such as Skandia UK Best Ideas or Rensburg UK Managers Focus and the final third into a global fund such as T Bailey Growth or Jupiter Global Managed.

2 Unlock money from your pension

Following changes to the pensions rules last year, you can now release some money from your pension while continuing to work. This money could then be used to fund education costs.

It is not a viable option for parents of younger children as you have to be over 50 — rising to 55 from 2010 — but it may prove useful if you have a second or third child going to a private secondary school, or your son or daughter is off to university.

You are allowed to withdraw up to 25 per cent of your pension as a tax-free lump sum. If you are in a company scheme, you should be able to release the cash and carry on working — if the trustees have changed their rules.

If you have a personal pension, the remainder must be invested in a drawdown plan where it stays in the stock market. Before last year, you had to start drawing an income from this as soon as you had released the tax-free money, but that is no longer the case. And you do not have to draw it down in one go.

Say you had a pension fund worth £400,000; your tax-free lump-sum entitlement would be £100,000. If your annual school fees were £10,000, you could withdraw £40,000 from your fund, take £10,000 (25 per cent) as a lump sum and invest the remainder in a drawdown plan. You could repeat this in later years.

Tom McPhail at Hargreaves Lansdown said: “Remember pensions are designed to provide an income in retirement, so make sure you can really afford to unlock this cash.”

3 Get help from grandparents

Many grandparents are willing to help with childcare and education because it helps reduce their inheritance tax (IHT) liability.

Individuals can give away up to £3,000 a year and this immediately falls out of their estate. In addition, small gifts of up to £250 can be made, which are exempt from IHT. You can also give away regular amounts out of your income, as long as it does not affect your living standard.

Grandparents who have surplus income often put the money towards their grandchildren’s education and reduce the value of their estate in the process. It is best to detail the gifts so they do not fall foul of the taxman.

4 Use a trust to stay in control

Grandparents who want to give away a lump sum in the past used trusts to keep control of their assets, but Gordon Brown made this much more difficult.

The old favourite was an accumulation and maintenance trust, where the trustees retained control of the income until the child’s 25th birthday and the capital for up to 80 years.

Since last year, they have been subject to a 20 per cent tax charge on gifts above the £300,000 IHT threshold. The main alternative now is a bare trust, where children inherit at 18.

5 Think carefully about discount schemes

Some schools offer discounts if you can pay fees upfront, often for at least three years. Schools use projections of future fee rises when calculating the discount, but you could still be asked to stump up more cash in future.

Suppose a boarding school charged £20,136 for fees this year and offered a 4.5 per cent discount for paying three years in advance. Assuming it expected fees to rise by 5.9 per cent a year, you would pay £61,160 rather than £64,000. However, if you paid each term, and kept the money invested, you would only need the money to grow 3.5 per cent a year after tax for the growth to outstrip the discount.

Schools like the schemes because they can invest the money — and earn interest tax-free because they have charitable status. However, there are restrictions on the discount parents can be offered because schools are not allowed to pass on all the benefits of their tax-exempt status, so the discount will never be as big as the benefit to the school.

6 Apply for a scholarship

Most private schools offer scholarships and bursaries, usually for gifted children. Their values tend to be 5 per cent - 10 per cent of the annual fees.

7 Remortgage to release equity

An easy way to raise money is to remortgage and release equity from your home. House prices have risen by an average of 48 per cent in the past five years, according to Halifax, so millions of families have big sums available.

If you would be charged a penalty for redeeming your mortgage, contact your lender and ask for a further advance. It will probably charge its higher standard variable rate, but that may be cheaper than paying the penalty.

If you are nearing the end of a deal, or are not locked in with penalties, it will probably be cheaper to remortgage and take out one loan for the entire amount.

The disadvantage is that you will receive it as a lump sum, but will not need the entire amount in one go. The rate you get from saving the extra, after tax, will probably be lower than your mortgage rate.

8 Offset your savings against borrowings

One alternative is to use an offset mortgage. Say you have a £100,000 mortgage and £30,000 in savings, you would only be charged interest on £70,000. Your mortgage would be cleared more quickly because your repayments would be based on the full £100,000 so you would in effect overpay each month.

However, the “reserve” you build up — the £30,000 plus your overpayments — can be accessed at any time to cover school fees; when you don’t need the money, it is reducing your debts.

9 Overpay and underpay on your mortgage

Most mortgages have a degree of flexibility, which can be useful if you are tied into a deal and unable to remortgage to an offset.

Many lenders will allow borrowers to make overpayments, and take payment holidays or make underpayments further down the line. If you are planning to send your son or daughter to private school in a few years’ time you could make overpayments now. You will then be able to reduce your payments once you have started paying school fees.

10 Buy an endowment policy

Investments with set maturity dates, such as traded endowment policies, can be useful as you can buy schemes that mature in consecutive years.

For example, Policy Plus has a Royal London policy that matures in March 2010. The purchase price is £7,684 and the monthly premium is £10.32. If bonus levels are maintained, it will be worth £9,458 at maturity. This equates to an annual growth rate of 7.46 per cent.

Planning ahead

Rachel Jefferson started planning early for school fees. Her daughter, Olivia, is not yet two but Rachel, 34, and her husband, Richard, 39, have been saving towards education costs since their daughter was born. They have been saving monthly into Isa funds: Rachel is investing in T Bailey Growth and Richard is saving into Jupiter Merlin Balanced.

Rachel, a financial adviser from Oldbury in the West Midlands, said: ‘We’re not definitely going to send Olivia to private school but want to be in a position where that option is available when the time comes.’