02 Nov Is your children’s lifeline of credit leaving you in need of a lifebelt?
By Justin Urquhart Stewart, Seven Investment Management.
When you think about banks, most people’s minds meander down the High Street, thinking of names – some of which have actually been assigned to the annals of history – as well as the likes of Lloyds, HSBC and my old shop, Barclays. No one’s mind, I venture, would just stay at home.
But numbers now show that the Bank of Mum and Dad is now our ninth largest mortgage provider, up a place in the rankings from the year before. And the parental (and grand parental) generosity doesn’t stop there.
In a survey we ran among 2,025 representative UK citizens in the summer, some 15% of parents were helping their adult children with property payments. But 42% are offsetting their offspring’s day to day living expenses and a fifth (21%) of parents are rallying round for car costs. Parents are also sharing the hefty financial burden of university costs (17%) and paying off other debt (13%).
The truly sad thing here is not that many families are pooling their funds – it’s the potential impact on the parents’ long term financial wellbeing that concerns me. And that’s mainly due to the longevity of some of these monetary lifelines. It’s almost expected that you’d help out your 18-21 year olds and 42% are. However, 30% are helping 22-29 year olds, a quarter (25%) are assisting 30-39 year olds and 18% are giving contributions to children into their 40s.
So what can you do, so that when you get off the career treadmill, your finances are fighting fit for your retirement? Here are three pieces of advice that have held me in good stead… touch wood!
- The sooner you save…
Little and often is an excellent approach when it comes to investing for children or indeed anything. Saving £100 a month for 18 years in an investment fund generating 5% annual growth could give you around £35,000 – a good financial head start in life. Yes, of course, investments can go down as well as up and there are risks involved. But the sooner parents start putting money aside, the less drastic any sudden support will be later on down the line. And it’ll help your kids – no one needs the burden of almost bankrupting someone you love.
- Prioritise the pension
It seems a little counterintuitive to be putting money in your pension when you’ve always invested in your children. But your considerable efforts to help them get to university now seem to leave them in a financial hole. The situation today means that kids can finish their studies with £50,000 in debt and incur a whopping 6.1% in interest rates from the day that they get their money – not at the end of their course as some seem to think is the case.
Putting aside my view about this stupid system, you should actually think through what they’ll pay back rather than what’s on the balance sheet, especially since it doesn’t actually count as debt. Yes, it will be included in calculations as to what they can afford, but only once they’re over the £21,000 a year earning threshold and then they only pay 9% on any marginal income. If they never earn that over the 30.5 years after they leave university they won’t need to pay back a penny. And from 2021, that starting threshold may also begin to rise again, if it doesn’t become politically expedient to do so earlier.
You could even use the system to your advantage and think whether the first few retirement years could be spent in full time education. If your pension is below the threshold, you could fill your days and your mind at the state’s expense.
- Be at least a little selfish
With children moving out of home later in life and everything seemingly terribly expensive these days, it’s only natural that you want to help out. But are you in danger of moving from back stop to their first port of call for everything? When I went to university I compounded my lack of understanding of credit cards with feckless finances and developed debts that took me several years to pay off. My parents quite rightly refused to bail me out. And while it was a hard lesson at the time, I never repeated the experience.
So there is a time when you will need to draw a line in the sand and say enough is enough. A few weeks ago I was on stage in front of an audience drawn from Financial Times readers talking about rich-kid-itis – a lingering malaise that affects children that are far too spoiled. But any child to be honest is in danger of contracting a deep dependency disease as far as finances go. The good news is that almost anything can be treated if nipped in the bud.
Seven Investment Management LLP is authorised and regulated by the Financial Conduct Authority. Member of the London Stock Exchange. Registered office: 55 Bishopsgate, London EC2N 3AS. Registered in England and Wales No. OC378740.