09/07/19Bank of Mum and Dad: Can you afford to support family?
The Bank of Mum and Dad has become essential for many first-time buyers struggling to scrape together a deposit to secure a mortgage. However, research indicates that children and grandchildren are increasingly relying on financial support for a variety of reasons.
Whilst you may be keen to provide as much help as possible to loved ones, you may also be worried about the impact it will have on your own financial security. Understanding whether you are in the financial position to offer some form of monetary help can give you the confidence and peace of mind to do so.
So, how are parents and grandparents providing support for adult offspring? Offering a helping hand when purchasing a house makes up a sizeable chunk of the money handed over, however, it is not the only area where financial support is sought.
- Research from Legal and General suggests that in 2019, up to £6.3 billion will be taken from the Bank of Mum and Dad to fund thousands of property purchases. By offering up sums to act as a deposit, parents are financing around one in five transactions in the UK property market. The average amount received for this purpose is £24,100.
- Relatives are also putting their money into the entrepreneurial ventures of children too. A survey conducted by Worldpay indicates that around one in ten small businesses owners asked their parents to invest in their idea. With under-35s twice as likely to seek family support than older generations, it could be a growing trend.
- Finally, figures from SunLife found that more than half of people aged over 55 are financially supporting their children. Around a fifth are providing more support than they had planned to. This is despite some feeling as though their own finances are being squeezed as a result.
What is causing the trend?
There are many reasons why children or grandchildren could benefit from financial support, some of which may be personal. However, generally speaking, wage growth has remained low whilst expenditure, including property, has continued to rise. As a result, younger generations are often finding it a struggle to balance the books and still reach life milestones, from buying a first home to starting a family, without risking financial instability.
It is natural that as a parent or grandparent, you want to provide support to help loved ones live comfortably. Whilst your heart may be saying ‘yes’ when they ask for help, your head may have some reservations. That is normal too. After all, if you place your own financial security at risk you will not be in a position to provide support at all.
Making it part of your financial plan
Whether you want to offer ongoing support, to cover school fees for grandchildren, for example, or a one-off gift, you should make it part of your financial plan.
This gives you the insight needed to understand how your finances will be affected in the short, medium or long term. Would taking a £25,000 lump sum out of your savings to act as a house deposit mean you could run out of money in later retirement, for instance? By building gifts and monetary support into your financial plan you can make an informed decision based on your circumstances.
Often, potential benefactors find they are in a better position to help than they first thought. Using financial planning to fully understand the long-term consequences of gifting means they decide in full confidence and with complete peace of mind.
It is not just confidence that financial planning can help with either, but deciding which assets to use:
- Would your long-term wealth be impacted more by withdrawing from investments or cash savings?
- What is the most tax-efficient way to access large lump sums?
- Will the support potentially be liable for Inheritance Tax?
- Could you replace the money at a later date if you choose to?
Financial planning can help you answer the above questions and more to create a solution that is right for you.
If you decide you are not in a position to offer financial gifts, there are likely to be alternative options too. You could, for example, act as a guarantor on a mortgage to allow for a lower deposit or provide a lump sum on a loan basis. Financial planning can help you better understand what other routes there are to explore.
To discuss your financial situation and aspirations for helping loved ones find their feet, please get in touch.