Investing fees in advance to generate a return for independent schools

The ~2,600 independent schools in the UK have received a lot of press as a collective this year with the new Government's introduction from 1st January 2025 of VAT on school fees.  While schools have traditionally been exempt from charging VAT on their fees, from 1st January 2025 schools will have to charge VAT on top.

Some schools have 'sucked this up', maintaining their fees and swallowing the VAT themselves, though most have been forced to pass on some or all of the VAT to the parents.

Following the Government's announcement of their intention to levy VAT on private school fees, many independent schools invited their parents to pay their fees in advance in order to avoid having to pay the VAT.  While it is likely that this approach may not actually avoid the payment of the VAT, for various technical reasons, it does mean that schools are generally carrying more funds in these advance schemes than ever before.

What is a Fees in Advance Scheme?

This is simply a method that some schools use to allow their parents to pay upfront for several years of school fees.  There are various reasons that it might be attractive for both parents and schools, which we summarise here.

Discounts for payment upfront

Often, in order to incentivise the prepayment of fees, schools will offer a discount for doing so.  This can be a small symbolic gesture of less than 1%, or a larger incentivising gesture of 2-3%, or even more.  Schools will also sometimes agree to lock in or 'grandfather' the fees that are paid at the rate on the date of payment, adding the benefit to parents that on top of the discount they will also be insulated from any fee increases while their child is a pupil.

Advance funding for schools that's cheaper than bank borrowing

This is attractive to schools, too, because it means that they can 'borrow from the future', rather than borrowing from a bank.  When it comes to investing in facilities or new equipment, this helps schools' funds to go further.

Other use-cases

There are other uses as well, including:

• For parents lucky enough to receive a windfall or bonus, once they have ticked the usual boxes (like maximising their pension contributions or ISA entitlements), this is a helpful way of using surplus funds; and
• For grandparents who may wish to support their families by gifting some or all of a grand-child's education, this can be an effective way of doing so, locking in any discount available and insulating the parents from any future fee increases.

How our high-interest, zero-risk deposits can help

Many schools will simply deposit any fee prepayments in a high-interest savings account with their bank.  This has the dual benefit of being both easy (because the banking arrangement already exists) and transparent (because the balances can often be seen on online banking), lending itself to useful reporting.

We would advocate for a much more proactive approach, however, not least because the rates of return on traditional bank savings accounts are so low, but also because these prepayment balances are so important to schools for the future that a fine balance must be struck between return, risk, and liquidity.

Return: Paying market-leading rates of interest

The return on fees prepaid will be of acute interest to school bursars.  Our Fees in Advance offerings pay the following rates of interest, which exceed any presently on offer from a high-street bank:

• 1-month Notice: 76.5% of the Bank of England Base Rate (3.89% AER on a base rate of 5%)
• 3-month Notice: 81.0% of the Bank of England Base Rate (4.11% AER on a base rate of 5%)
• 12-month Term: 85.5% of the Bank England Base Rate (4.28% AER on a base rate of 5%)

For schools of any size, this can result in a meaningful return.  We walk through a few worked examples below.

Risk: Safeguarding funds at the Bank of England

Bursars, governors and trustees will be keen not to take a risk with the prepaid fee deposits.  At the very least, any traditional banking relationship will involve a bank's credit risk (the risk of the bank becoming insolvent, like Royal Bank of Scotland during the global financial crisis, or Silicon Valley Bank and First Republic in 2023, and even Credit Suisse), but also its investment risk (the risks it takes in lending clients' money out to third parties).

Savvy bursars may have taken steps to minimise this risk, say, by depositing up to £85,000 (the current limit of the Financial Services Compensation Scheme protection) at various different banks, but this is both time-consuming and administratively burdensome.

Our accounts are different.  We store your deposits securely, in cash, safeguarded at the Bank of England.  Even in the unlikely event of our own insolvency, your prepaid school fees would be 100% protected, with no upper limit.

Liquidity: Balancing this with Return - Our approach to 'blending'

Like all other banks, our shorter notice products pay a lower rate of interest than the longer-term ones.  We work with every school to blend the perfect mix of liquidity and return, checking in with you regularly and ensuring that you have just the right of cash ready to be paid over for the beginning of term or to meet certain milestones on construction/investment projects.  

This means that we can help schools to get the best possible 'blended' rate of return on their cash deposits, which will often be far better than the 1-month Notice rate paid.

Actually 'zero-risk' - Safer than Bonds

There is a long-standing fallacy that investing in government bonds (or 'gilts') is a zero-risk investment exercise, and many wealth managers offer direct investment in gilts or even investments in managed funds made up principally of gilts.

A recent Financial Times article really struck at the heart of this long-standing myth:

• "The worst of it is that the notion of bonds as safe assets is pure myth [...] Between October 1946 and December 1974, UK government bonds lost 74% of their value.  In fact, UK bond investors lost half their real wealth during the inflationary period between 1972 and 1974"

The conclusion by the UBS Global Investment Returns Yearbook (2024) authors is that 'sovereign bonds are not "safe" assets and their real value can be destroyed by inflation'.

Our high-interest, zero-risk deposit facilities, by contrast, are structurally inflation-proof.  This is because our clients receive such a high proportion of the Bank of England base rate, and the base rate itself is the Bank's strongest tool to curb inflation - the base rate is, by definition, over the longer term, always higher than inflation.

Worked Examples

So what could our offerings offer to a hypothetical school over the longer term?  We have worked through a couple of examples based on the current (5%) Bank of England base rate, but you can use our free interactive high-interest deposit return calculator to get an accurate view for your school.

A day school with fees of £20,000/yr and 30 pupils prepaying

If we assume a 5-year prepayment, with year 1's fees being used up immediately to pay for year 1, this means that each child's contribution to the scheme will be 4 x £20,000, or £80,000.  With 30 students prepaying this, the school will have £2,400,000 to save.

On this, if invested in our 1-month notice product, the school would earn a further £97,134 each year.  In practice, we would be able to work to blend a better overall interest rate.

A boarding school with fees of £40,000/yr and 15 pupils on prepaying

If we assume a 5-year prepayment, with year 1's fees being used up immediately to pay for year 1, this means that each child's contribution to the scheme will be 4 x £40,000, or £160,000.  With 15 students prepaying this, the school will have £2,400,000 to save towards the future education of its students.

On this, if invested in our 1-month notice product, the school would earn a further £85,927 each year.  In practice, we would be able to work to blend a better overall interest rate.  

Conclusion

The present climate and high base rate presents a huge opportunity for independent schools to bolster the coffers in a zero-risk way.  In addition to this, if the school is requesting payment of the VAT charge upfront as well, the compounding effect on this prepaid VAT will be able to add a further dimension to the already attractive rate of return.

If you would like more information or to open an account, please don't hesitate to request a call back.