Parents in the South bankroll children’s housing costs more than anywhere else Financial pressure mounts on the ‘Bank of Mum and Dad’

7^th October 2014: The ‘Bank of Mum and Dad’ is under unprecedented pressure to bail out dependent children at the expense of parents’ own retirement plans, wealth manager Brewin Dolphin can reveal.

 

Tim Walker Head of Office and Divisonal Director at Brewin Dolphin in Exeter

An exclusive survey, carried out by YouGov on behalf of Brewin Dolphin, shows that the parents of today’s under 18s in the South of England are planning to delay retirement, compromise their lifestyle and dip into their hard earned pension pots and home equity to help out their children and grandchildren.

38% of all parents in the South of England believe that in their lifetime they will have to contribute between £25,000 and £100,000 per child in order to cover home deposits, university fees and other living expenses.

“The Bank of Mum and Dad is facing its own financial crisis across the country,” warned Tim Walker Head of Office and Divisonal Director at Brewin Dolphin in Exeter. “Our planners are finding increasing numbers of anxious help with other areas of their lives. The pressure is such that we’re also seeing the emergence of second generation clients facing demands from their children who cannot get on the property ladder or need financial funding from the ‘Bank of Grandma & Granddad’.”

The pressure on families is far higher than it was even a few years ago, with 40% of parents of today’s under 18s believing that they will have to compromise their lifestyles because of the demands on their children, compared with just 26% of parents with children who have already reached adulthood.

“While many parents are willing to give, it is important that this is not done at the expense of their own retirement planning, particularly given the current uncertainty around annuities and income generation”, Tim Walker adds. “People in their 30s and 40s now will generally not enjoy the pension pots their parents did, and this survey shows a worrying trend towards parents needing to choose between helping their children and sacrificing their retirement savings. It is important to take proper advice and consider the future before signing cheques to your kids, however well intentioned.”

The YouGov Survey showed the following top findings from the South of England:

Financial implications

·       31% of all parents believe that being the ‘Bank of Mum and Dad’ will compromise their lifestyle, and 8% think they will need to downsize their home to release equity

·       18% of all parents believe that they will have to retire later because of a need to help out their children

·       14% of all parents believe that helping out their children financially will reduce the size of their pension pot, fuelling concerns about source of income in retirement following recent regulatory changes

Areas of parental help

Parents who have already given money to their adult children have focused on housing, grandchildren and education, as well as buying their child’s first vehicle.

·       40% of parents in the South of England have needed to assist their children with housing costs, which could be due to rocketing house prices, stringent new mortgage rules and rent increases

·       25% have given money to help bring up the grandchildren, creating a ‘Bank of Grandma & Granddad’

·       A quarter of parents have helped their children with university fees

Younger families under pressure on a national scale

The parents of younger children – currently under 18 – are facing far greater pressure to bankroll their children than those with older children. Their expectation of the support they will need to give is far higher, as is the expected effect on their lifestyles.

·       25% of those with children who are currently under 18 expect to retire later due to financial demands from their children, compared with 10% of those whose children are already over 18

·       11% of parents with children under 18 will need to downsize their home to release equity  to give to their children, compared with 7% of those with children over 18

·       4% of parents with younger children think they will need to take on riskier investments to target higher returns because of the family’s financial burden, compared with 1% of those with older children

The Five Retirement Mistakes To Avoid

Making the right decisions at retirement will make all the difference to your financial security and affect how you pass your wealth down the generations. Tim Walker divisional director of Financial Planning at Brewin Dolphin in Exeter discusses the most common mistakes people make at this critical time and how to avoid them.

Tim Walker - Divisional Director at Brewin Dolphin Exeter

The five retirement mistakes to avoid

Making the right decisions at retirement will make all the difference to your financial security and affect how you pass your wealth down the generations. Tim Walker divisional director of Financial Planning at Brewin Dolphin in Exeter discusses the most common mistakes people make at this critical time and how to avoid them.

1. Retiring too early

It is likely your pension will be near to its highest value when you reach retirement. However, the timing of your retirement could have a significant impact on the level of income you receive. Generally, though subject to investment content and market fluctuations, the longer you can leave your pension fund invested, the larger the fund will become. This is due to compound interest which Albert Einstein described as “the eighth wonder of the world”.

2. Making the wrong choice with your pension

When you retire, most pensions do not automatically start to pay you an income. You have to make a choice: either to buy an annuity, which will pay you a guaranteed income for your lifetime, or take income drawdown, where your pension pot remains invested and you draw an income based on how your investments perform. Annuities suit those who need a guaranteed income and are a lower risk option than income drawdown, where your income may fall as well as rise.

For many people, a combination of guaranteed income through annuities and State or other pensions, combined with some income drawdown can provide the best of both worlds.

3. Not shopping around for the best annuity

If an annuity is the right choice for you, shopping around for your annuity can improve your income significantly. The shopping around process is known as using the ‘open market option’. If you are a smoker or suffer from poor health then you may be entitled to an even higher income, via an ‘enhanced annuity’ – it is always worth disclosing health conditions and lifestyle information when getting an annuity quote.

4. Not taking your full tax-free cash entitlement

After age 55 you may have the option to draw a pension commencement lump sum which is usually 25% of the fund value. If needed this could be used to clear your remaining mortgage, take a cruise or provide a supplementary income to your pension. Otherwise, leaving this money within your pension pot can offer valuable tax benefits, so take advice before you act.

5. Paying more tax than you need to

Perhaps the biggest tax mistake I see is people not using their Individual Savings Account (ISA) allowance. Retirement is the time when you will convert your portfolio from pursuing a growth objective to delivering an income and this process is easier and cheaper if your investments are sheltered in ISAs. ISAs are free from capital gains tax and further income tax and can provide you with a great source of tax free income.