First the bad news – and it is pretty bad if you’re a parent of children yet to plough their furrow on further education. The cost of university, which for many parents is a key long-term savings goal, is set to soar at an unprecedented rate over the coming years for English students.  

Research from Witan Investment Trust shows that today’s newborns will have to find almost £85,000 for their university education in 2028, compared with £33,000 today.  

While inflation (factored into the calculation at 3 per cent) will push their living costs steadily up, the crippling price hike is in annual university tuition fees, which are due to rise from the current level of around £3,200 to £6,000 (up to £9,000 for top universities). Witan estimates that by 2028, fees alone for a three-year course will total £44,000. 

Parents need to start saving as early, and as tax-efficiently, as they can if they want to ease the financial burden on their children starting adult life. That means making as much use as possible of their Isas. Investors pay no further income tax or capital gains tax on returns from their Isa investments. 

The slightly better news in this respect is that from 6 April 2011, annual Isa subscription increases will be index-linked, following movements in the Retail Price Index as of the previous September. For this tax year (reflecting the RPI in September 2010) the allowance is set to rise from £10,200 to £10,680. 

But, of course, for most parents with young kids and day-to-day demands on their limited budget, any rise in the Isa allowance is largely irrelevant, as they just don’t have a spare £10,000 knocking about to tie up for the next 18 years. 

One way around the problem is to save regularly into an Isa out of your monthly income. Figures from the Association of Investment Companies show that if you had saved £50 a month into the average investment company (within a tax wrapper) for the past 18 years to 31 January 2011, you’d have accumulated £23,500. 

The same monthly contribution to the average unit trust for 18 years would be worth £21,100. For today’s students, that would make a big inroad into their £30,000-plus expenses.   

However, for parents of younger children, Witan’s study makes alarming reading. Assuming an average growth rate of 5 per cent, it shows that even if parents start as soon as their baby is born in 2011, they’ll need to channel £237 a month into their Isa in order to meet that £85,000 university bill in 2028. 

Moreover, if you’re only now thinking of setting up a savings scheme to see your child through university, your monthly contribution needs to be a whole lot larger. Further education fees and living costs for a child now aged 12 (so heading for college in September 2017) will amount to £58,250, according to Witan; with fewer than seven years before the first tranche is due, you’d need to invest almost £570 per month from now on. 

Clearly, the earlier you can set up some kind of scheme, the better. But the same principles apply, whatever you’re saving for: if you start early and protect your investment’s dividends and capital growth from tax in an Isa, even a relatively modest monthly sum will build impressively over the years. 

Saving regularly has a number of advantages for long-term investors, beyond making it possible to build up a significant lump sum. 

For a start, it’s relatively painless for spendthrifts. ‘It’s a great deal easier to set up a direct debit straight from your monthly income than to try and save up enough for a lump-sum investment, with the temptation to “borrow” from your earmarked cash always hanging over you,’ says Justin Modray, founder of Candid Money. 

Regular investment also does away with the issue of timing your entry to the market. Ideally, lump-sum investors aim to enter just after the bottom of a downturn, when shares are cheap but sentiment is improving and prices are likely to rise. The risk is that they leave it late and jump on the bandwagon shortly before the market peaks and then nosedives.  

With a regular savings arrangement, in contrast, you’re paying in every month, come rising or falling markets, and there’s no need to second guess where prices will go next. Indeed, you do well when they’re low, because your cash buys lots of cheap shares and you’re then well positioned to benefit from an eventual recovery. Drip feeding through good and bad markets alike also brings the related benefit of pound cost averaging (as illustrated in the box below).

There’s a further consideration when you’re investing regularly within an Isa. Most Isa lump-sum investors only actually commit their money to the market as the end of the tax year approaches and the Isa marketing season heats up. Not only is there a risk that fund prices are inflated by increased investor demand at that time, but also those lump-sum investors have missed out on any market growth for almost the whole tax year. 

For instance, look at the returns to mid February 2011 produced by a £1,200 lump-sum  investment into the UK all companies sector, made on 1 April 2010, just before the end of the last tax year. Since then it has grown by around 13 per cent, to £1,354. However, if that £1,200 had been drip fed in every month over the course of the 2009/10 tax year, it would now be worth £1,578 – a growth rate of 31.5 per cent. 

It’s important to note that regular saving loses out to lump-sum investment in strong upward equity markets, because in such conditions it’s best to be fully invested. But, of course,  that involves ‘timing the market’, as you have to assess when to commit your cash – and when to bail out. Regular savings, in contrast, are at their most effective when markets are choppy and there are plenty of dips in which to pick up cheap shares.

So how do you go about setting up a regular saving arrangement? It’s possible to drip feed cash into a unit trust or Oeic. ‘I don’t know of any fund management group that doesn’t allow that – certainly, on the fund platforms we use it’s just a matter of selecting the direct debit option when you fill in the form,’ says Sally Merritt, spokesperson for Bestinvest. ‘Typically, platforms specify £50 per month per fund.’ 

Investment trusts and investment companies are a popular alternative for long-term investors saving for their children’s future. As Andrew Bell, chief executive of Witan, says: ‘They are typically significantly less expensive in terms of fees than unit trusts and Oeics, and this cost differential can make a considerable difference to performance returns over the longer term.’ 

Outperformance is further helped by their different structure and the fact they are allowed to borrow to invest. But these factors also make investment companies more volatile than open-ended funds.

Normally, shares in investment companies are purchased through a stockbroker. The broking fees involved would make them an expensive option for small regular savers; but many investment company management groups operate cheap, simple regular savings plans for people wanting to invest in the trusts run by that group. Alliance Trust Savings offers cheap access to any UK trust. If you don’t feel comfortable making your own choice, consult an independent financial adviser who uses them. 

Pound cost averaging

By drip feeding money into an investment each month, regardless of whether the market’s rising or falling, your payment buys units at a range of prices – fewer, pricier ones when the market’s booming, and lots of very cheap ones when it’s low. In most market conditions, except prolonged bull runs, this means the average price you’ve paid is lower than the average market price. 

The table uses the example of investing £50 a month for six months, in which time the share price dropped and recovered.

Average share price: 82.5p
Total shares bought: 375

Actual cost per share (£50 x 6 = £300/375 shares = 80p per share)