9 February 2022
In recent years, the so-called “Bank of Mum and Dad” has become synonymous with the idea of helping younger generations onto the property ladder.
As property becomes less and less affordable for first-time buyers, the term has been coined to reflect the increasing contributions parents (and grandparents) are making towards helping their loved ones with the deposit for a home.
However, new research has revealed that the Bank of Mum and Dad help out in a range of other important ways. Indeed, assisting with university costs, allowing adult children to live at home, and buying a car or helping with car-related costs are all more common ways of financially supporting adult children than contributing to a deposit for a home.
Read on to find out more about the ways in which you might be financially supporting your children – and what this might mean for your own finances and plans.
1. Helping with the costs of going to university
Students planning to go to university, and their parents, routinely underestimate the average debt of a graduate.
We’ve previously revealed that students expect they will finish their course with average debt of £37,803 while the average parent expects their children to leave university with debt of £24,852.
However, official figures indicate the average debt of a student who finished their course in 2020 is actually £45,000.
While there are loans available to pay tuition fees and some costs of living, research from Save the Student reveals that the average student receives £120.56 a month from parents.
Almost 3 in 5 parents say they are financially supporting a child in this way, potentially to the tune of several thousands of pounds a year. And, as we have previously considered, there may be more beneficial ways for you to help your children or grandchildren than paying off student loans.
2. Letting children live at home
Half of all parents quizzed said they had allowed their child to remain living at home, rent-free.
This is a means of financial support that it’s easy to overlook, simply because you may not have to literally put your hand in your pocket to provide help. However, according to Statista, around 42% of young adults aged between 15 and 34 lived with their parents in the UK in 2020, compared with 35% in 1999.
One of the key consequences of letting your adult child live with you is that it may delay your own plans. Perhaps you had considered increasing your pension contributions when your child had graduated? Or maybe you were intending to downsize to a smaller home to release some equity, but you now can’t because you need the space?
3. Assisting with car-related costs
Passing your driving test and getting your first set of wheels has been a rite of passage for generations. And, according to the latest research, this shows no signs of changing.
46% of respondents said they had helped their adult child to buy a car, or with car-related costs. Money Helper report that the average cost of car insurance for a 20-year-old in 2020 was £851 and, when you add in the cost of repairs, road tax, and fuel which, according to the Daily Mail, is approaching an all-time high, it’s perhaps no surprise that parents are stepping in to help.
4. Helping with a house deposit
Estate agent Savills say that, over the past 10 years, parents have subsidised first-time buyer activity to the tune of £53.9 billion, helping nearly 1.4 million buyers access their first home.
If you plan to assist your child or grandchild with the deposit for a home, it’s important to consider several factors:
- Is the money a gift or a loan? Do you expect it to be repaid?
- What happens if you gift to a couple, and they later separate? Do you want to “protect” the gift you have given your own child?
- Do you need to put paperwork in place to formalise the agreement?
In addition, will handing over a large sum damage your own financial plans? It’s important to think about how providing a lump sum could affect your own retirement. Will you have to accept a lower standard of living?
One way to gain peace of mind is to speak to a financial planner. For example, we can use sophisticated cashflow modelling software to consider the impact of providing financial support to a child on your own financial future. We can determine whether you will still have “enough” to live the life you want, even if you decide to support your child in the short term.
5. Contributing to savings/ISA
Around 1 in 4 respondents to the survey said they had opened the doors to the Bank of Mum and Dad by contributing to their child’s savings account or ISA.
Becky O’Connor from the firm who commissioned the research says: “Among those parents who are able to help, it’s heartening to see payments into pensions and ISAs feature among the responses – a recognition that there are other ways to assist beyond leg-ups onto the property ladder and where the rewards might not be reaped for decades to come.”
6. Helping with childcare
Again, as you may not be writing a cheque, helping out with childcare might not seem like financial support. However, with the rising cost of nursery care, caring for a grandchild can provide an essential cost saving for many parents.
2021 research published in the Guardian revealed just how heavily parents relied on family for childcare, with more than half (56%) of parents saying that they rely on grandparents for help.
7. Making a pension contribution
It might feel like the ultimate long-term plan, but there can be a range of benefits for saving into a child’s pension – even if they are still teething!
Pensions are an extremely tax-efficient way of building a nest egg. Even non-taxpayers benefit from tax relief on contributions so, in 2021/22, parents could contribute £2,880 to the pension of a child with no earnings, and this would be grossed up to £3,600. Children will then also benefit from decades of potential compound returns.
Of course, the downside is that children are unlikely to be able to access their pension until at least age 57, and possibly later if the rules change. So, it’s not suitable if you want to help them buy their first home or meet the costs of further education.
Get in touch
If you are thinking of opening the doors to the Bank of Mum and Dad, and you want to check that you can do it without adversely affecting your own plans, we can help. Email firstname.lastname@example.org or call 0161 8080200 to find out more.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
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