The Bank of Mum and Dad is in high demand. Young people are increasingly turning to parents and grandparents for help to reach life’s milestones as rising house prices, the soaring cost of living and a tough jobs market mean they’re hard to achieve without a leg up.
But could this generosity be having an impact on your own financial situation?
Analysis for the Mail carried out by PensionBee reveals that parents who help their kids are at risk of retiring more than £100,000 worse off.
The Bank of Mum and Dad dished out an estimated £8.3billion last year for house deposits alone, according to estate agents Savills. More cash was gifted to help with everything from driving lessons and university costs to weddings and rent. An estimated £5.5trillion is expected to be passed down the generations between 2017 and 2055.
Maike Currie, from PensionBee, says: ‘Parents who should be putting more money into their pension or building up their savings are using that cash to help their grown-up children. On paper they may look financially comfortable, but they could be putting their own retirement at risk.’
A 50-year-old parent with a pension pot currently worth £150,000, who continues to contribute £500 a month, could retire at 68 with £460,546, PensionBee found. This assumes annual growth of 4 per cent after fees.
If they had an additional lump sum, for example from an inheritance or workplace bonus, that could give their retirement a serious boost. An extra £10,000 contribution to their pension at this point could mean a retirement pot worth £480,800 by age 68 – that’s an extra £20,300 in the kitty.
But a parent who gave the money to a child to cover the cost of a wedding wouldn’t benefit from this extra growth.
Parents who help their children could be missing out on years of investment growth on their pensions, experts warn
PensionBee found that because of the effect of compounding, money invested at age 50 roughly doubles by age 68.
To make up the difference, they would need to increase their usual £500 monthly contribution by £65 or continue working for an extra ten months.
Currie says: ‘Not only are parents giving away money they could be saving for retirement, they’re also losing out on years of potential investment growth.
‘For parents in their 50s and 60s, those final years of pension savings can make a real difference to how comfortably they live in later life.’
Bigger gifts mean a bigger deficit. Contributing £15,000 towards university living costs would mean retiring with a shortfall of £30,400, compared to someone who had invested that sum.
The parent would need to save an extra £97 a month from age 50 to make up the difference, or work for an extra year and four months past their planned retirement age of 68.
A survey of 2,000 adults by Standard Life found 75 per cent of parents who had helped children aged 18 and over said doing so had affected them financially.
Some 27 per cent had dipped into their savings to help, while 15 per cent were planning to delay their retirement or have a more modest retirement as a result.
About 45 per cent of first-time homebuyers in their 20s receive financial help, according to a report by the Pensions Policy Institute.
The average amount given towards a deposit is £25,000, it found. But giving this to a child rather than putting it into a pension could leave you £50,600 worse off at retirement, according to PensionBee.
A 50-year-old would need to save an extra £162 a month to make up the shortfall by 68 or work for an extra two years and three months.
And first-time buyers in certain parts of the country might need a bigger leg up. Those able to make a lump sum contribution of £50,000 to their pension pot at age 50 could retire with £561,800.
But gifting that amount for a house deposit could leave parents £101,300 worse off by retirement.
Making up the difference would require saving a massive £323 a month extra, or working for four years and eight months longer than planned.
Some 46 per cent of parents surveyed by Standard Life said they felt a responsibility to help their children, while 47 per cent wanted to protect them from debt or financial hardship. A further 11 per cent said they viewed the financial help as a form of early inheritance. That becomes an issue when it has an impact on their own financial plans, says Mike Ambery, retirement savings director at Standard Life.
‘It’s completely normal for pension savings to take a back seat when you’re focused on supporting children, but parents must not lose sight of their own financial goals,’ he adds.
Of course, this does not mean parents should refuse to help their children if they want to and can afford to do so. But it is important to check you are on track for your own goals first.
Consider the level of income you will want in retirement and what you’ll need to save to get there. Pensions UK’s retirement living standards offer a helpful guide.
It suggests a moderate retirement lifestyle requires an income of £32,700 a year for an individual or £42,400 for a couple. This includes state pension but does not factor in housing costs.
Bear in mind that retirement often lasts 20 years or more, so you need to be confident your money won’t run out. Care costs could add to the bill in later years.
Consider boosting your pension contributions, and seeing if your employer offers to match that could help. Higher rate payers should claim back extra tax relief if necessary.
If you can’t afford an outright gift to your children, consider a loan. Be clear about the terms and write down what you have agreed, says Currie.
For parents of younger children, Ambery suggests investing in a Junior Isa. This way you can save smaller amounts over a longer period, which will benefit from investment growth, rather than forking out a large lump sum at a key moment in your own financial planning.
Investing £50 a month from birth until age 18 could grow to more than £19,000 – enough to cover university living expenses. This assumes annual growth of 6 per cent.
If the money were left to grow until the young person is 25, it could reach almost £30,000 – more than enough for a house deposit.
Currie says: ‘Generosity is a wonderful thing, but there is a fine line between giving a helping hand and putting your own financial future on the line.
‘Ideally any help should come from spare income or savings, rather than dipping into your pension pot or cutting contributions.’