Killik Private Education Index

Transcription

1 Killik Private Education Index A Cebr report for Killik & Co July 2015

2 Contact Killik Wealth Planning

3 Contents Executive Summary Introduction 5 School fees continue steep upward trend Average day fees climb to 13,194 in Total cost of an education Educational extras cost a further 3,000 per year Over 14 years, day school fees plus extras for a child starting now would total 286, With two children, projected total for boarding school plus extras rises to almost 900, Considerable savings available from state schooling during early years 7 4 How fees compare to salaries Affordability for the top 25% of earners Affordability for families with combined salaries Variation by region 9 How else could this money be used? 10 Conclusion 11 Disclaimer Whilst every effort has been made to ensure the accuracy of the material in this document, neither Centre for Economics and Business Research Ltd nor the report s authors will be liable for any loss or damages incurred through the use of the report. Authorship and acknowledgements This report has been produced by Cebr, an independent economics and business research consultancy established in The views expressed herein are those of the authors only and are based upon independent research by them. The report does not necessarily reflect the views of Killik & Co. London, July Centre for Economics and Business Research 2

4 Foreword First, some good news for many parents who are educating their children privately now, or intend to do so in the future - fees have increased relatively modestly over the last 12 months, when compared to many of the previous years. The bad news, as this report highlights, is that the numbers involved are still pretty eye-watering for many families. Our research shows that the average annual fee has increased this year by 471, taking the average school fee to 13,194 per annum. As we highlighted in our report last year, fees in London and the South East continue to increase more each year than other parts of the country and now stand at 15,500 and 14,350 respectively. Another pattern is also becoming clear - that affordability for school fees is reducing for those who may have historically sent their children to private school without a second thought. For many families a private education is only now affordable where both parents are working. Even then the fees can put a squeeze on the family finances. Indeed, with the total cost of educating one child privately at day school from the age of five through to completion of A-Levels now standing at 286,000 we are seeing an increasing number of grandparents from the baby boomer generation offering to help with paying private school fees. One thing is clear meeting the cost of a private education needs careful planning. That s where we can help with our Killik & Co SecureLife Service, which analyses and models the impact school fees will have on your overall finances. In particular it enables us to look at the affordability of school fees over both the duration of your child, or children s, education and over your lifetime. That means we can, for example, assess the impact on your financial position in retirement. For further information on how Killik Chartered Financial Planners can help you to put together a cohesive and effective strategy for private education funding please do contact me, or a member of the Killik Wealth Planning Team, on / KillikWealthPlanning@killik.com Sarah Lord Managing Director Killik Chartered Financial Planners Partner Killik & Co Centre for Economics and Business Research 3

5 Executive Summary The average cost of a year at day school has increased from 12,723 in 2014 to 13,194 in Fees at independent day schools have more than quadrupled since Fees have increased ahead of earnings every year since then. Educational extras such as uniform, books and sports kit add up to another 3,048 per year. Low inflation means that these are up by just 0.5% over 2014 levels. Over an education of 14 years, the total sum for a day school, with educational extras, has risen from 271,000 for a child starting in 2014 to 286,000 for a child starting in For two children starting in 2013 and 2015, the total sum of day schooling and extras has climbed to 553,000 compared to 526,000 had they each started a year earlier. Total fees plus educational extras over 14 years of private day school Years at school Total bill: 1 child Years at school Total bill: 2 children ,000 Older Child: ,000 Younger Child: ,000 Older Child: Younger Child: ,000 For pupils who board (starting at 13 typically pupils would be at day schools until then) the sum for an education starting in 2015 would be 468,000 compared to 435,000 on calculations from With two children starting schools in 2013 and 2015 who start boarding at 13, parents would pay 890,000 versus 831,000 for the same education starting in 2012 and Total fees plus educational extras over day school until 13 followed by five years at a private boarding school Years at school Total bill: 1 child Years at school Total bill: 2 children ,000 Older Child: Younger Child: ,000 Older Child: Younger Child: , ,000 Annual schooling costs including extras are now worth 38% of a doctor s disposable (i.e., aftertax) salary and 59% of an accountant s. By 2028, these costs will rise to 53% and 81%, respectively, as rises in fees outpace earnings. The same trend applies for many other occupations. Continuing a long-standing trend, London has seen the fastest rises in day fees of any region, though East Anglia saw almost as high an increase. London s fees remain comfortably at the top, with fees in the North of England the lowest in the country. The second-highest fees are found in the South East, with those in Scotland the second-least expensive. Centre for Economics and Business Research 4

6 1 Introduction This is the second Killik Private Education Index, coming a year after 2014 s initial report. It draws on the latest figures for private school fees from the Independent Schools Council and contextualises them in light of broader economic trends. As well as looking at long-term trends, this report compares fees to salaries in various occupations, both whiteand blue-collar, compares fees across regions and projects total costs of fees and extras over an entire educational career up to university and early 2015 has seen the economic recovery continue for the UK with growth in output of 2.8%. But the recovery remains fragile and incomplete, with the most significant missing ingredient being a meaningful pick-up in earnings. Across the economy, businesses expect to increase average wages by 2.1% over the year starting April 2015, compared to last year. Adjusted for inflation, earnings are yet to return to levels they reached before the financial crisis. Deflation has taken a little pressure off parents finances, with the cost of everyday educational essentials growing by only 0.5% since last year. This is reflected to a degree in the school fees statistics, which remain on a muted growth path compared to their rates of increase during the precrisis years. However, despite a mild slowing, fees are still climbing above wages and significantly above other prices. In January 2015, consumer prices were up by 0.5% on a year earlier while day fees had increased by 3.7% and boarding fees by 4.0%. 1 The gap between gains in earnings/prices and increases in school fees is a consistent phenomenon, as seen in Figure 1. Its effects over the long term are clearly visible when we compare yearly fees to salaries and see another rise in the proportion of a salary taken up by educational costs. Figure 1 Wages and fees, yearly % change, Killik Private Education Index By Numbers 286,000 Average cost of sending one child to a private day school starting in ,000 Average cost of sending two children to a private day school ( and ) 468,000 Average cost of sending one children to a private school if boarding from 13 onwards, starting ,000 Average cost of sending two children to a private school if boarding from 13 onwards ( and ) 13,200 Average private school day fees in ,000 Average cost of private day school in 2028 if recent trends persist 38 Percentage of the average doctor s salary that would be required to pay for private school fees for a single child in Percentage increase in private day school fees since ,000 Reduction in cost of education to be made from sending one child to State until 8 versus private day school throughout 3,000 Average spend on educational extras for each child e.g. music lessons, sports kit in School fees continue steep upward trend 2.1 Average day fees climb to 13,194 in 2015 The average annual fee for an independent day school has increased from 12,723 in 2014 to 13,194 in This continues a long-established trend dating back to at least 1990 of above-inflation annual fee rises. The cumulative effect has left the average day school fee 342% higher than it was in Adjusted for inflation, the increase has been 153%. Boarding schools are significantly more expensive than day schools at an average of 30,369 per year. The average annual fee rise over the long term has been very similar to that of day schools at 6.2% per year for each between 1990 and Therefore the two lines in Figure 2 track each other very closely. Figure 2 illustrates the evolution of fees to this point and projects forward to 2028 to give an idea of school fees for children starting their education now and who therefore would be finishing in The Independent Schools Census calculates these figures on a like-for-like basis, meaning only including schools which completed their annual census in both years, making the % change appear different. Centre for Economics and Business Research 5

7 Please note forecasts this far ahead are subject to considerable uncertainty, but are made on the basis of present trends in school fees continuing without any large economic shocks. Figure 2 Day and boarding school fees versus average prices, (projected), 1990=100 prestige. In 1989 there were some 12,000 pupils in British private schools whose permanent homes were abroad, equivalent to 2.6% of the total private school population. 2 Whereas in 2015, 27,000 or 5.3% of the pupils at ISC schools were from overseas and a further 17,000 were foreign with parents living in the UK. 3 Foreign pupils, whether living in the UK or abroad, make a particularly important contribution to proportions of new pupils as the overall population has not changed by much over the timeframe, growing from slightly below 500,000 to 517,000 today. Our projections to 2028 see day and boarding fees increase by a further 104% and 105% respectively in cash terms. This is equivalent to 52% and 53% respectively in real, i.e. inflation-adjusted terms. This would mean that day fees in 2028 will be 9.0 times higher than they were in 1990 and boarding fees will be 9.1 times higher. The equivalent projection of average consumer prices, across the economy, is just 2.3. What drives school fees to increase so much faster than the prices of other goods and services? Part of the reason is an economic law which means that service activities, like education, become more expensive than manufactured goods in the long run. While factories can introduce ever more powerful and sophisticated equipment to churn out goods more quickly, teachers cannot teach more than a certain number of children at a time without the quality dropping. This means the cost of services rises relative to the cost of goods. But private education costs are rising above those of other service activities, which requires further explanation. It seems the ability to pay for private school has driven this. Section 5 shows how professional occupations traditionally associated with using private schools are finding a progressively bigger chunk of an average salary goes on school bills. This may be forcing the composition of private schools to shift towards the wealthier members of those professions. But evidence of this is scarce as data on private school parents salaries do not exist. What we do know is the proportion of international students at UK private schools, and we know it is rising as a British private education carries international 3 Total cost of an education 3.1 Educational extras cost a further 3,000 per year Educational extras are items such as sports kit, uniform, books and school trips that enter the cost of educating a child as well as the fees for education itself. Over 2015, a representative sample of these was found to cost 3,048 over a year, compared to 3,032 in 2014 an increase of just 0.5%. Compared to other years and compared to rises in fees themselves, a year of mild inflation or deflation in some products has left parents spending only slightly more in day-to-day educational costs. Figure 3 shows these costs by category. Figure 3 Educational extras by item, over time Source: ONS consumer prices index, Cebr analysis 2 Independent Schools Council Census Independent Schools Council Census 2015 (figures have been rounded). Centre for Economics and Business Research 6

8 3.2 Over 14 years, day school fees plus extras for a child starting now would total 286,000 We turn now to the costs over a whole education, rather than just for one year. These figures include the educational extras every year as well as the fees themselves, though fees are by far the dominant component. Since the yearly fee has increased so rapidly, the final cost ends up being much higher than 14 times the average in the starting year for example, in 2015 the average day fee is 13,194 plus 3,048 in educational extras, yet the estimated total cost of an education between 2015 and 2028 of 286,000 (projecting fee levels forward 4 ) is approximately 18 times the first year. Figure 4 below presents the total costs of various date ranges over which a child is at school, in the past, present and future. For boarding schools, this shows boarding only from the age of 13 (year 9), a standard age at which many boarding schools start taking pupils. Before that we assume private day school education. The costs for boarding schools exclude various items which would be covered by the fees, such as school meals. Figure 4 Total costs of sending one child to a private day school versus sending a child to day school followed by boarding school, including educational extras, over various date ranges estimated costs, including the educational extras that are required over the course of schooling. Again, the children only board from the age of 13. Figure 5 shows how these costs, for children starting school in 2013 and 2015, would run to 890,000 if current trends persist. By comparison, parents whose children are finishing boarding schools at the moment that is, in 2013 and 2015 would have spent a far smaller amount by now, at only 450,000. These sums far outstrip the equivalent for those who started school in 1990: a day school education cost 197,000 for two children starting 1990 and Boarding from 13 for both was available for an average of 267,000 in total. Figure 5 Total costs of sending two children to a private day school versus sending them to day school followed by boarding school, including educational extras, over various date ranges Source: Independent Schools Council Censuses , Cebr analysis 3.4 Considerable savings available from state schooling during early years Source: Independent Schools Council Censuses , Cebr analysis 3.3 With two children, projected total for boarding school plus extras rises to almost 900,000 Many parents are sending two or more children to private schools. We take a hypothetical family with two children two years apart to illustrate the Parents can try to reduce the financial burden that private schooling entails. Many believe that private schooling has greater benefits for the latter part of their children s education; it is then a matter of judgement at what age the educational benefit becomes worth the financial sacrifice. Many decide it makes sense to move a child from the state to private sector as they transition between primary and secondary schools. We find that for a child entering school this year and leaving in 2028, sending a child to private school at age 11 and age eight save 97,000 and 52,000 respectively. These are significant amounts that are very likely to affect the decision for some parents. 4 To do this, we project current trends forward adjusting for Cebr s view on the UK economy. Centre for Economics and Business Research 7

9 Figure 6 Costs and reductions in cost versus full private schooling of state until 8 and state until 11, including educational extras, since the pool of very wealthy international parents is much larger than the number of overseas pupils currently in British independent schools. Figure 7 Cost of day school and educational extras, % of various disposable salaries (average salary by occupation) 6 Sources: Independent Schools Council Annual Census, Cebr analysis 4 How fees compare to salaries The effect of the rapid rises in fees is visible in Figure 7. Various professions have seen fees rise much faster than their salaries, leading to these large jumps in education costs as a percentage of their disposable (i.e., after-tax) income. The last (and tallest) bars represent forecasts for 2028, the year by which a child entering school this year will leave sixth form, based on projections of the current trends of fees and of salaries. For example, between 1990 and 2028 the proportion of a typical doctor s disposable income taken up by educational costs will have risen from 17% to 53%; today it is 38%. For accountants, the proportion starts at 26% in 1990, rises to 59% today and promises to reach 81% by The figures for members of the clergy are less promising still: by 2028, 122% of their income will be taken up by fees. Clearly this would make a private education for their children impossible most private schools, however, do offer bursary schemes to help less affluent families. Many parents of new pupils have been able to afford much larger fees than parents of past cohorts. While part of the explanation is the growth in domestic wealth, that cannot on its own explain the rise in fees. Private schools today educate around 7% of children 5, but even the highest incomes have not risen as fast as school fees. By bringing in a pool of international students, average incomes of parents effectively rise at a much faster rate. A potentially worrying factor, from the point of view of many professions graphed below, is that the trends can continue potentially for a long time Sources: Independent Schools Census, Annual Survey of Hours and Earnings, Cebr analysis 4.1 Affordability for the top 25% of earners The salary shares shown in Figure 7 may sound surprisingly high. Is it plausible that academics, say, really spend 69% of their salaries on education? The average professional is not the typical private school parent at least, not any longer. Those sending their children to private school are also more likely to be more senior in the jobs listed, due to the financial barrier. Therefore, we also make a comparison of educational costs to the top 25% of earners in the same professions/occupations, that is, the salary of the 75th percentile. This shows how the core users of these schools are finding the costs ever harder to bear as wage increases fail to keep pace with the rises in price of independent schools. Figure 8 Cost of day school and educational extras, % of various disposable salaries (25% highest earners by occupation) Sources: Independent Schools Census, Annual Survey of Hours and Earnings, Cebr analysis 5 Independent Schools Council Census Note that statistics on chief executives earnings must be treated with caution as the definition is periodically altered by the ONS. Also, much of their earnings may be excluded from the base salary. Centre for Economics and Business Research 8

10 4.2 Affordability for families with combined salaries Apart from being in the top 25% of earners in their profession, another way that families in professional classes can still afford a private school place is by combining two salaries. The gradual, long-term increase in female labourmarket participation 67% of women worked in 1990, compared to 70% on the latest data (with professional jobs accounting for much of this) means that more families are in this position than a few years ago. The burden is far lower for professional couples than the single earners that we considered in Figure 8. For instance, a couple can afford boarding school more easily than a female professional can afford day school fees. Figure 10 Total day school fee bill including educational extras for two children under different scenarios, in total and as a % of total disposable income, 2013 to 2026 and 2015 to 2028 Sources: Independent Schools Census, Annual Survey of Hours and Earnings, Cebr analysis Totals as % of total disposable income over period Figure 9 Affordability for (professional) households with combined salaries, including educational extras, compared to families with a single (professional) earner 5 Variation by region Sources: Independent Schools Census, Annual Survey of Hours and Earnings, Cebr analysis Over the course of an education, having two children takes up a significant proportion of earnings over the same time. We consider here a family with combined salaries, taking home two professional wages over the entire time that their children are at school. Figure 10 shows what these proportions would be, according to the number of years that a family s children spend at private (day) school. Again, this supposes that the children start school whether private or state in 2015 and In general, fee rises have been stronger in areas with the highest fees. The gap has widened around the country since 2000.This pattern has broadly continued between 2014 and 2015, with the gap widening further. London fees, the highest already, have drawn further ahead of the rest of the country, powered by London s economic growth. The pattern correlates with the latest growth in house prices, with London, the South East and the East of England leading the country in terms of recent house price growth. By contrast, Wales is emerging only slowly from recession and seeing very tepid economic growth. Its school fees have barely risen on 2014 values, edging up just 0.1%. Again, in terms of house price growth it has the slowest growth of any region. West Midlands has therefore just overtaken Wales in terms of average day fees. Scotland s private schools are the cheapest of any part of the UK apart from the North. This is a longstanding trend it was also the case in In Scotland, a lower proportion of children attend private schools than in the UK as a whole: the figure is 4.4% compared to close to 7%. 7 But in other respects schools north of the border are similar. Scottish private schools are international, with students from abroad making up 30% of all pupils at boarding schools. Their school fees have grown at a similar rate to those in other parts of the UK since 2000, as Figure 11 shows. 7 Scottish Council of Independent Schools, facts and statistics: Centre for Economics and Business Research 9

11 Figure 11 Average day fees by part of the UK, 2000, 2014 and 2015 Source: Independent Schools Census ,000, again assuming a 4.1% annual rate of return, which could finance university. However the child would have full control to withdraw assets upon their 18th birthday. If, having set up a Child SIPP and Junior ISA, the remainder of the average annual day school fee ( 6,234) was invested in a general investment account for children annually for 14 years and then left untouched until the child reached 30 this could be worth 210,000, assuming a 4.1% annual rate of return, that could comfortably pay for a wedding and significantly contribute to their first house purchase. 6 How else could this money be used? With such a large sum potentially at stake, it makes sense for parents to ask whether the amounts that they would have invested in their children s education could not be better invested to set them up financially for life, while sending their children to a good state school. We consider the 236,000 that represents 14 years of day school fees from 2015 (representing the 286,000 mentioned earlier and subtracting 49,000 in educational extras, as these would be spent over the course of an education anyway), and alternative uses of it. One such use would be to annually invest on behalf of the child the money that would have been spent on school fees each year over their 14 year school career. Taking advantage of the amazing impact of compound interest to build assets of almost 800,000 that could help them in later life to pay for university, buying a house as well as leaving them comfortably off in their twilight years. If a parent or grandparent contributed to a Child SIPP the maximum annual allowance of 2,880 (boosted to 3,600 thanks to 20% tax relief from the government) over 14 yearly payments, thanks to the power of compounding this could be worth 500,000 by the time the child retires at 65, assuming a 4.1% annual rate of return. A further 4,080 annually invested tax-efficiently into a Junior ISA for 14 years could be worth Centre for Economics and Business Research 10

12 7 Conclusions School fees continue to be a serious financial concern for many families. With wage growth yet to pick up since the financial crisis, families with children at private schools will feel financially squeezed. This may be particularly stark in comparison to everyday living costs, which are mainly stagnant or falling. Nonetheless, many in this country and around the world feel the price is worth paying for the advantage conferred on their children by a British private education. The scarcity of the top institutions means that they can continue to raise fees at substantially higher rates than overall price rises in the economy, without experiencing any reduction in demand because the worldwide pool of potential students is so large. Consequently school fees take an ever bigger chunk out of salaries, causing shifts over time in the composition of private school pupils. We see today that occupations such as construction workers and clergy are already priced out of private education unless they combine two salaries or can obtain a bursary; by 2028 that may apply to average members of professional occupations such as doctors and solicitors. In reality, it is probably the higher-paid members of such professions who send their children to private school anyway. But the trend of fees rising more rapidly than wages means that it will gradually apply to more and more members of the middle classes until only very few of their number can attend. At some point private schools may have to think about the balance: having an international pupil body clearly brings advantages, but the idea of institutions which are not rooted in their own area is less desirable. Despite the costs, investment in education looks like a good idea for those who can afford it. If you had invested capital in UK equities over a 20-year horizon, a typical annualised real return would have been around 4.1%. By contrast, the average return on private schooling is estimated to be significantly higher. For example, academics estimate it to produce a wage premium over those who have attended state school of 7% by six years after graduation. Another study finds the premium to be 20% by age 33; a third finds a premium of 3%. In this sense, private education seems to outperform other investments, which helps to explain why despite the rising fees, parents continue to choose it. Centre for Economics and Business Research 11

13 Contact Killik Wealth Planning

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