SAVING for a child’s future has never been more expensive.

The cost of education has soared 13% over the past year, according to latest figures from the Office for National Statistics – and that’s on top of rising household costs in general.

School fees are the biggest nightmare for most parents. A family with four children ranging from 3-12 years old are looking at staggering tuition costs of as much as £1.5m, according to the latest figures from Barclays Wealth.

Changes to tax-efficient trusts, which came into force this month for existing schemes, have made the herculean task of saving for children even more difficult.

The government ended one of the most popular ways for parents and grandparents to put money aside for future generations.

Existing accumulation and maintenance trusts have, since April 5, been subject to 6% tax every 10 years – unless the parents make a declaration that the offspring gained control of the funds when they turned 18.

For many parents, this is not an option because they do not want their children to come into huge windfalls so young.

We asked three City mums how they invest for their children’s future.

Heather McGregor, Taylor Bennett

McGregor, who runs her own recruitment firm, and her wine-merchant husband, would have spent £64,000 this year on boarding school fees for their three sons, aged 12, 14 and 18.

However, they saved about £10,000 on fees for their eldest son by paying some of them three years in advance.

McGregor said: “One of the best things anyone can do is pay the school fees in advance. It’s one of the safest things you can do with your money in a climate of falling interest rates and a volatile stock market, because the return is effectively guaranteed.

“There are no arrangement fees or commissions and the school can generally earn interest tax free because of their charitable status, which most of them pass back to you.”

McGregor made a lump-sum contribution of £30,000 three years before her eldest started at Wellington College, Berkshire, at the age of 11.

At the time she secured a discount rate above 3% – equivalent to a return of 6% when you consider that if she had invested the money in a standard savings account she would have been taxed. Most schools offer even better rates now. Wellington now offers 4% on lump sum advances – equivalent to 6.6% for a higher-rate taxpayer – while Roe-dean, the top girls’ school near Brighton, offers 4.5%, or a gross rate of 7.5%.

However, you are betting that school fees will rise by less than the return you are getting.

Wellington’s fees are now just over £8,400 a term. If a parent paid a lump sum upfront of £50,000 for six terms in September this year, by the time the child starts school the amount toward fees would have grown to £62,340.

Meanwhile, fees at the school are rising by an average 5.25% – less than the national average of above 6% – so the total cost of six terms would have grown to £53,046.

McGregor said: “The key thing most parents don’t realise is that you can do this in advance. If, when the time comes, you want to send them to a comprehensive, most schools will give you the money back plus interest, although you will have to pay tax on the interest.”

Rebecca Constable, Kleinwort Benson

Constable has three children who are aged 12, 9 and 7.

Her parents have helped towards the children’s education by giving lump-sum cash gifts, which she could then invest in equity-index trackers or unit trusts.

The advantage of enlisting the help of grandparents is that if the parent provided a lump sum, any income above £100 would be taxed at her income-tax rate – 40% as a higher-rate taxpayer. However, this rule does not apply to grandparents, so the children can utilise their personal-income tax-free allowances, now £5,435.

Constable has also set up investments as a mix of “bare trusts” and “discretionary trusts”. The investments are still in her name, but when they are sold the proceeds are treated as the child’s – this is particularly useful as it allows them to make use of the £9,200 capital-gains tax (CGT) allowance.

However, Constable points out that when the child reaches 18, they will gain full control of the investments, which she said could be risky. In addition, a bare trust does not protect any income that arises from being taxed at her rate.

“If you are not comfortable with the idea that they would be able to access funds at age 18, then a discretionary trust may be a better match,” she said.

This enables parents to select which beneficiaries should received payments. The advantage of transferring assets such as shares into a discretionary trust is that you can defer the CGT.

Anna Sofat, founder, Addidi

Sofat has two daughters, aged 17 and 19. The family made use of baby bonds when the girls were growing up, in addition to child-trust funds when they were introduced five years ago. This enabled them to take advantage of the tax-free income benefits.

Baby bonds are a type of endowment plan – growth is tax-free if you invest for a minimum of 10 years. The maximum that can be invested is £25 a month or £270 a year.

Sofat said: “We invested in baby bonds from Liverpool Victoria, which invests in with-profits. These have had bad press, but the LV bond grew by 11.2% in 2006 and 5.7% in 2007.”

However, Sofat points out that those who are starting to invest now have the benefit of the cut in CGT from 24% to 18%, which has made shareholdings such as unit trusts more tax efficient and baby bonds less attractive.

Sofat said: “Parents can choose a mix of UK, global and specialist funds such as M&G Global as well as gilts and bonds to spread the risk.”

Income funds from Invesco Perpetual and New Star’s UK Alpha are strong performers, returning 44% and 43% over the past three years. Neptune Global Equity returned 13% in the past year while M&G Global Basics returned 18%.

She added: “While changes to accumulation and maintenance trusts were a blow, as these are not as tax efficient as they were, you still have the option of an offshore bond.”

Offshore bonds do not produce income or capital gain until the investment is cashed in – parents can withdraw an income of 5% a year tax-free.

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