Middle East business information

For the last six years, Liverpool Victoria has completed an annual survey to calculate the cost of raising a child.

This year's survey shows that parents should expect to spend Dhs1,162,500 to raise a child until the age of 21.

This is equivalent to Dhs55,375 each year, or Dhs150 a day, per child. Putting it another way, the average expatriate will have to put aside nine or 10 years wages, per child, just to raise them to the age of 21!

As you would expect the survey has shown an increase year on year, with a 4% increase compared to last year's figure and a 38% increase since the first survey, which was produced in 2003. Figures such as these could certainly be the deciding factor between having a single child or several children.

Compounded costs

It's not just about keeping kids dressed, fed and entertained that parents need to think about. The rising cost of a university education, coupled with spiralling house prices, mean many children will still be reliant on the 'bank of mum and dad' long after they turn 18 or flee the nest.

As most parents will already know, childcare and education remain the biggest expenditures; these are estimated to cost parents Dhs323,000 and Dhs301,500 respectively.

As a result of the current economic downturn, many parents are now feeling a drain on their finances and are forced to reduce their spending, making decisions based on what is happening now with little thought for the future. As a result, many parents are having to lose the second car, downscale their accommodation or go without an annual holiday just to cover the next year's school fees.

But, despite the economic downturn, the cost of schooling in the UAE continues to rise at what, to those who are not lucky enough to have education costs included in their employment contract, is a very alarming rate. Indeed, many schools are increasing their charges by the maximum permitted level.

Fees at the 10 most expensive schools in the UAE will range from Dhs63,500 a year to Dhs92,000. All but one of these most expensive schools are in Dubai. Such fees take the education costs for those in the UAE much higher than the Dhs301,500 calculated in Liverpool Victoria's survey.

Cutting extras

Inevitably the first thing to go is the extras, the luxuries such as holidays, short breaks and leisure activities. There is also the option to buy second hand or indeed sell some outgrown or unused items in order to raise money.

Of course you could argue that further education is not obligatory, but on the other hand can your client afford not to educate their child? Surely a child's education is the best investment a parent could ever make. But it is not only the cost of education to bear in mind, whether it is incurred through private or further education; there is also the added cost of uniforms and clothing; books and school trips.

Consequently, action has to be taken and the earlier it is taken the less painful it will be. The solution is the old adage 'invest today to be ready for tomorrow'.

Children's Saving Plans

Parents take out children's savings plans for a number of reasons; some want to save for a deposit on their child's first home, others wish to save for their child's wedding or allow the child the opportunity to set up a business when they come of age.

However, the most common reason that parents establish a savings plan for their child is to save towards future education fees and they do this by building a 'pot of money' over time with a regular contribution savings plan.

A child's plan, through saving a small amount on a regular basis, offers parents the potential to earn real growth on their savings. Most children's savings plans are flexible enough to allow the parents to alter or suspend contributions as unforeseen expenses arise and draw money from the plan as school or university fees are due.

As children get older, investment principles can also looked at. For example, by investing regularly over a long period of time the principle of 'Dollar Cost Averaging' can be used to show that fluctuations in stock markets (as we have recently seen) will be of benefit to the investor long-term.

This offers two valuable lessons: 1. Buy low or invest extra in falling markets and 2. Do not take drastic action or panic in times of market volatility; whilst things looks bleak on interim valuations, the downturn will not last forever.

Such policies may also give grandparents a means to actively contribute to their grandchildren's future. Many grandparents really want to do something for grandchildren but do not know how to or they do not have the means to do so solely by themselves. Indeed, for grandparents domiciled to countries where there are death taxes, such policies prove an excellent way to pass money on to future generations tax-efficiently.

How to save

There are a wide variety of policies available which can be used as children's savings or education fee plans. These can be simply broken down into those which are funded from capital and those that are funded from income. Either way, the current economic downturn makes this a very good time to invest. Planning ahead is more important than ever, and saving as much as possible, even if this is little and often, could help to ease future financial pain.

Funding from capital
If capital is available to invest for education expenses (perhaps from generous grandparents!) tax efficient investments can be used to maximise the return on this capital. Such investments, often known as offshore bonds, can be established with $22,500 or more. The investment return is partly dependent on the length of time before fees have to be drawn down, so the sooner you start the better.

Funding from income
The benefit of saving for a child's education is that the investment is generally for the longer term (more than 10 years) and very often made on a regular basis. When saving smaller regular amounts, the best way to invest is through an offshore savings plan. A good regular contribution policy will allow the parents to reduce or increase the contributions that they make, and take withdrawals or payment holidays if required. This means that the parents can change the plan to meet their changing lifestyle; which is crucial for it to work over the long term.

And, contrary to popular belief, the parents do not have to invest huge sums to make a difference. By choosing to pay the minimum monthly contribution (often as low as $150 per month), and based on an 18 year term, the pot could be over $51,000 assuming an average growth rate of 5% per annum - which could substantially ease the burden of education costs or make a huge difference to the child's start in adulthood.

Both the lump sum and regular contribution products provide access to pooled investment funds which allow the policyholder to invest in a wide range of equities and other securities such as commodities and bonds.

These funds may be actively managed - where a fund manager picks individual stocks based on a view of their future potential - or passively, where a manager invests in all the shares that comprise a stock market index, such as the FTSE 100 or the S&P 500.