Survive the sandwich years
We all know and accept there will be stages in our lives when we have to tighten our belts – we expect to be eating beans on toast as students, and are prepared for holidays camping in the back garden with young kids.
Yet we do all this in the belief that at some point there will be a payoff: when our kids leave home, we’ll have no responsibilities, and it’ll be champagne and world cruises all the way. Or, at the very least, we’ll have a bit of spare cash that will give us the opportunity to live a little.
But something strange is happening – that long-anticipated ‘golden age’ is fast evaporating. Not only are kids refusing to leave home, and leaning increasingly heavily on their parents, elderly parents have started turning to the in-between generation for financial help too.
Before you know it, you’ve become the piggy bank in the middle, and are back to beans on toast again. This is a depressing reality for many people in their 50s and 60s right now, and looks set to be even more of a problem for the next generation.
The kids are alright
High house prices and bigger student debts mean that young adults are losing the ability to stand on their own feet. According to Engage Mutual Assurance, 49% of parents are helping kids over the age of 25 with the basic costs of living.
Donna Bradshaw, an adviser with the independent financial advisers IFG, says: “It’s got a bit scary. Children now go to university, come out the other end, and are still living with their parents. It’s not particularly healthy. Your children don’t learn the value of money and end up feeling entitled to have everything handed to them on a plate.”
Francis Klonowski, owner of Klonowski & Co, the independent financial advisers, wouldn’t advise his clients spend their money in this way, but admits it’s difficult not to. “I’m helping my own children out,” he admits. “I always assumed that by the age of 21 they would be self-sufficient. But nowadays setting up on your own has become a great deal more expensive, so children are increasingly asking their parents to help out.”
A newer, and perhaps even more alarming, phenomenon is the number of children asking their parents for help with debts. Engage says 22% of parents have helped out with their children’s debt in the past six months.
As Ashley Clark, director of needanadviser.com, points out: “A lot of young adults got themselves into debt because credit was easy to get hold of before they were mature enough to understand the consequences.”
Other parents are called upon when their children want to get onto the property ladder. According to Scottish Widows, 29% of adult children rely on parental contributions to buy their first home. Views are mixed as to whether or not this is a good idea. Clark says it can be sensible, given the right conditions. “I would have no hesitation in recommending parents buy a property for their children – if they can afford it, pay the right price and get the right borrowing,” he says.
But Bradshaw warns: “I worry about parents buying property for their children at inflated prices. If you buy a student flat to rent and make money from it, that’s another matter. But do your sums and make sure it will pay before you commit.”
Respect your elders
Elderly parents can also be a financial burden. Engage says 25% of Britons with parents over 65 are concerned about how they will cover the costs of their parents’ retirement. Many are helping out with the basics. The Engage figures show 22% have given money to their parents to make ends meet.
Clark warns: “I wouldn’t advise this, because of means-testing. If you give your parents regular payments and they then need care, when they’re assessed for care fees, the authority will count these contributions as part of their regular income.” However, he adds: “When it’s your own mum and dad in need, what else are you going to do? Financial common sense goes out of the window.”
Further down the track, those with elderly parents can run into difficulties paying for care. Engage says 22% are paying towards their parents’ care. This is a huge dent in the family budget, and is often as big a drain on resources as the mortgage.
In an ideal world, the in-between generation could meet all these costs, because they’ve been wise enough to save for every eventuality. For example, you can put money away for big expected expenses, such as a house deposit for your kids, and if you’re worried about your parents’ finances – such as the cost of care – you can also make preparations ahead of time.
If you start more than 10 years in advance, you can put this into a shares-based unit trust or investment trust, in order to take full advantage of the growth potential of this kind of investment. Saving a small amount each month will come out of the family budget without too much pain, and enables you to drip-feed money into the markets – avoiding buying at the top.
As the time you’re likely to need the money approaches, you can move it into less risky assets such as bond-based unit trusts and cash, so that if the stockmarket plummets the day before the money is required, your gains won’t be wiped out.
However, there are plenty of last-minute emergencies where the only practical savings vehicle is an instant access bank account. If you save little and often, and aim to build up a fund of £5,000 to £10,000, this should help with most potential worst-case scenarios. Of course, the more people you have leaning on you (and the more vulnerable they are) the larger this emergency fund should be.
But back on planet Earth, the reality is often different and few of us have the opportunity to save in this way. As Brian Innes, an adviser with IFA group Towry Law, explains: “Parents find it hard to prepare for helping grown-up children, because they may have only just finished paying for public school or university.” Likewise, Engage found that only 1% had saved money to help support their parents in retirement.
Put yourself first
You can jeopardise your future by helping out family members. According to Scottish Widows, 36% of parents who have loaned or given away money had planned to use it in retirement. This could mean they have to lean on their children as they get older, and the vicious circle continues.
So, surviving these ‘in-betweener’ years calls for creative financial planning. There are ways to help your children that don’t involve shelling out a fortune – or you can offer help in such a way that it yields a return for you at a later date.
If your children are living at home, why not charge rent? But remember, as Ashley Clark points out: “To make sense, it has to be a market rent.” This will prevent your kids draining the household finances, and may even encourage them to consider moving out. At the very least, it will give them an understanding of the value of money before they leave home.
In the case of funding a house deposit, you could offer to be a guarantor on the mortgage instead. This means you will only have to dip into your own pocket if your child has problems paying the mortgage. Alternatively, you could view it as an investment, and offer them a lump sum in exchange for a percentage of the property.
But this needs to be agreed sensibly, with plans for how that investment will be realised, and over what kind of timescale.
In the case of debts, you could ensure your help is a one-off by structuring your support rather than just handing over a cheque. Clark suggests: “Parents can choose not to help out with the debts themselves, but to agree to ensure the basics, such as mortgage payments and car insurance, are covered while their children get back on their feet.”
Francis Klonowski adds: “I had one client whose son had run up £90,000 of non-mortgage debt. They helped out, not in repayments, but with the monthly costs, in a way that made sure the money was safe from his creditors.”
However, the main problem is that parents find it hard to refuse requests for financial assistance from their children, so one alternative is to encourage them not to ask. Clark says: “I have clients who have not even told their children how wealthy they are – on purpose.”
Asset rich, cash poor?
When it comes to helping cash-strapped parents, the solution often lies close to hand. Thanks to rising house prices over the past 20 years, many older people will find that they have a lot of equity tied up in their homes. Engage says that 5% of people expect their parents to release equity in order to afford retirement, while 6% say their parents have downsized to cover the cost of their old age.
If your parents are prepared to sell up and downsize, this may mean they can stand on their own feet. Or it may be worth considering an equity-release plan – this involves taking a loan against the value of the property without losing the right to live in it. If this doesn’t release enough cash, they may have to sell up and move in with their children. Engage says 3% of adults with parents over 65 have brought their parents to live either with them or with relatives, and 14% say they expect to do so.
All these options involve making some pretty big decisions, and there will always be downsides. For example, downsizing can be expensive once you have taken into account additional costs like stamp duty and estate agents fees. Charges on equity-release mortgages can rack up pretty fast too, and while having your parents move in with you may be cost-effective, it may not be entirely practical. It’s always worth talking through the options with your family – it may well be that you can come up with a slightly more creative solution.
For example, if your elderly parents don’t want to sell the family home or enter into a formal equity-release arrangement, you can help out by stumping up a cash loan, with repayment written into their will. For example, Klonowski says: “You could help your parents out with a one-off cost, such as £4,000 for a private operation, and agree for that sum to be reflected in any inheritance. You could attach a codicil saying the first £4,000 in today’s money will go for repayment of this debt. It shouldn’t cause problems if everyone in the family knows what will happen.”
If you get your children and elderly parents to fend for themselves as much as possible, you should be able to put away money for you own future. In this way, you stand to become a generation of grandparents who can afford to help their grandchildren.
This can be a tremendous support. Sarah Pern, a 20-year-old student from London, says help from her grandparents was instrumental in allowing her to go to university. “My grandparents set up a trust fund for me when I was born. I get £700 a month throughout my time at university, as long as I complete my degree. And at the end of each year, if I get good enough grades, I get a bonus.”
Supporting grandchildren not only helps them, it can also be good for the older generations’ finances. Gifts to grandchildren could reduce an inheritance tax bill, and it means grandparents get to see their beneficiaries enjoy their inheritance. Meanwhile, it frees up their parents’ finances, so they can save for their retirement and, when the time comes, they should have money on hand to help their own grandchildren. So, with a bit of luck, what was once a vicious circle can turn into a virtuous one. l
Ten ways to help your kids without spending a penny
1. Start by teaching them the value of money by giving them an allowance when they are young
2. Ask for long-term investments for their early birthdays
3. Put their child benefit into a pension to give them a head-start when they retire
4. As they get older shop around for better deals for them, to help stamp out day-to-day overspending
5. Introduce them to a financial planner, and encourage them to get to grips with every aspect of their finances
6. Show them how to budget
7. Charge them rent if they are still living at home and, if you can afford to, put it aside for emergencies
8. Ask their grandparents to help with education costs
9. Agree to be a guarantor on a mortgage so they can buy their own home
10. Let them learn from their own mistakes
How Moneywise can help you manage your family's finances
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Generally thought of as being interchangeable with insurance but isn’t. Assurance is cover for events that WILL happen but at an unspecified point in the future (such as retirement and death) and insurance covers events that MAY happen (such as fire, theft and accidents). Therefore you buy life assurance (you will die, but don’t know when) and car insurance (you may have an accident). Assurance policies are for a fixed term, with a fixed payout, and unlike life insurance have an investment aspect: as a life assurance policy increases in value, the bonuses attached to it build up. If you die during the fixed term, the policy pays out the sum assured. However, if you survive to the end of the policy, you then get the annual bonuses plus a terminal bonus.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.