When the Bank of Mum and Dad has to say 'No'
It has been a long time since parents expected their kids to leave home and become financially independent aged 18, or 21. Tuition fees and rising property prices mean children are calling on the ‘Bank of Mum and Dad’ well into adulthood.
Research conducted exclusively for Moneywise by financial provider Aviva found that parents are largely happy to help their grown-up children with money.
More than a quarter (26%) said it was ‘very important’ for them to give their kids a financial leg- up, while 43% said it was ‘quite important’. Almost half (44%) wanted to help with their grandchildren, three in 10 were prepared to help foot the bill for education and training and two in five (38%) would help their kids to buy property. A quarter also said that they would pay towards home improvements.
However, while many parents want to help, running the Bank of Mum and Dad can be something of a minefield.
The Aviva research found that six out of 10 parents have been asked directly by their children for money and, for more than one in 10 (11%), it has become an all too frequent occurrence.
Three out of 10 parents questioned said they had, at times, felt pressured into giving their children money, while a small but significant 8% said they regularly felt an “undue pressure” to cough up.
Alistair McQueen, savings and retirement manager at Aviva, says: “This is literally millions of parents feeling pressured into helping out their kids.”
Worryingly, in a separate poll on Moneywise.co.uk (see the pie chart below), some 18% of parents went as far as saying their grown-up children “think our money is theirs”.
Parents under pressue
Some parents may want their children to stand on their own two feet, while others don’t want to throw good money after bad. Of course, you may simply feel that you can’t afford to help them.
“Younger generations are facing pressures that haven’t been seen before. Baby-boomers have benefited from job stability, strong house price growth and good pensions. Maybe this is parents responding to issues of intergenerational fairness?” Mr McQueen asks.
Claudia Hammond, Radio 4’s ‘Voice of Psychology’ and author of Mind Over Money: The Psychology of Money and How to Use it Better, agrees. “Parents see how hard it is for the current generation and feel they ought to help,” she says. “They may also see their friends doing it for their kids.”
Danny Cox, a chartered financial planner at Hargreaves Lansdown, sees a real dilemma for parents when it comes to big-ticket expenses such as buying a home.
“On the one hand, they think the best way for their children to learn the value of money is to have none, but at the same time if they don’t cut the corner for them how will they ever get there?”
Whether you’re handling requests for cash or are driven by a sense of parental responsibility, parents need to think carefully before stumping up cash to help their kids.
Gareth Shaw, head of consumer affairs at Saga Investment Services, says parents of this age – often dubbed the ‘sandwich generation’ – are in a precarious position.
“They will be thinking about the needs of their children, but may also have issues of care to think about with their own parents. This might involve working less to care for older family members or paying someone else to,” he says.
Talk about money
While high street banks may find it easy to say ‘no’, it’s not quite so straightforward for the Bank of Mum and Dad.
Ms Hammond advises parents to have a frank conversation with their children as early into their adult lives as possible. “People can get into adulthood with no idea about what their parents earn or what they have in savings. It means sitting down and having a conversation with them, which can be awkward,”she says.
But she adds: “Children need to realise that money spent on them means you will often be going without. You should also explain how you go about making decisions about what you can and cannot afford.”
Lee Robertson, an independent financial adviser (IFA) at Investment Quorum, agrees it’s vital parents talk to their kids about money, but says it’s not easy. “Families need to be as open as possible, but it is this great British thing that we don’t talk about money as if it’s a bit crass or showy.”
If you use an IFA, he suggests getting them involved in the discussion. “It can often help coming from a third party. We once spoke to a daughter who was getting money from her parents and she had no idea about the pressure she was putting them under. She was horrified, and we ended up coming up with a solution that worked better for both of them.”
It can also help to lay down ground rules in terms of when you will help. “Think about whether you would rather help them now or at some point in the future, ” says Ms Hammond. This might mean saying something along the lines of “we’re happy to invest in your future, but you need to work on your day-to-day spending”, she explains.
And when you’re giving money to children, it’s important you establish whether it’s a gift or loan. If it’s a loan, agree how and when you want it repaid.
As one Moneywise reader discovered, it’s also important to consider the risk of money ending up with your child’s partner in the event of a split and to set up legal agreements if necessary.
If you’re regularly giving money to your children, consider whether your ‘help’ is doing more harm than good. “They may end up living beyond their means if they know you are there to keep bailing them out,” says Ms Hammond.
Parents must also consider the impact of constantly dipping into their own reserves. “People are surprised how quickly a lump sum can disappear and when you are taking money out, it will also reduce its potential for generating income,” says Mr Robertson. Be particularly careful at times when cash becomes readily available: namely, when the opportunity to take tax-free cash from your pension arises and when you have paid off the mortgage.
“The temptation when you come into capital is to enjoy it or distribute it to the younger generation,” says Mr Shaw. “But paying off a mortgage is not just getting a pay rise, it should be about topping up your pension.”
Source: Legal & General and Cebr, May 2016.
Other ways to help
Just because it may not make sense for you to give your children cash, it doesn’t necessarily mean you can’t help them financially. Mr McQueen says: “Retired parents may not have cash on their side, but they may have time.”
This might mean saving them money by helping out with gardening, decorating or other jobs they might have to pay for. Childcare, in particular, can be very expensive for young parents.
If your kids want to save for their first home, you might encourage them to move back with you for a while – something that 69% of parents would be prepared to do, according to research by Moneywise.co.uk.
This can massively reduce the amount of time your kids need to save – even if you charge them a nominal rent. It’s best to be open with their children right from the start. As Mr Robertson says: “Parents will sometimes need to be strong and say ‘we love you, but we can’t help you or not as much as we would want’.”
Win one of 10 free copies of Claudia Hammond’s Mind Over Money book An engaging look at the way our brains affect our behaviour, Mind Over Money contains not only brilliant stories and practical takeaways, but also the late research in psychology, neuroscience biology and behavioural economics.
To be in with a chance of winning email firstname.lastname@example.org with your anecdotes and experience of dealing with family money issues whether you’re a child, parent or grandparent by 30 June 2016.
We need to talk about pester power...
Moneywise readers share their experiences of giving their adult children money.
“I’ve been bullied by a son and have got [such] a huge debt that I have had to go into a debt management plan and nearly split up with my husband over it. At the end of the day, those who can demonstrate tough love will give their children the best guidance and support.”
“We offered to sell our son and his wife our house as they needed to upsize at the time we wished to downsize. We dropped the price of ours by £30,000, with the proviso that the money would be paid back after five years.
Then our daughter-in-law walked out, leaving our granddaughter with our son. He can’t afford to pay us and our daughter-in-law’s solicitor told her there was no legal arrangement made so she didn’t have to pay her share – so she won’t. We learnt the hard way!”
“My wife and I are agreed that we would rather help our daughters (and three grandchildren) as required now rather than after our deaths.”
“My son asked for a loan of £500 yesterday, so he can replace his seven-year-old laptop that died a few weeks ago. He knows he can ask, but only does so if he really needs to and the last time he did, the money was paid back. We didn’t need it back, but the discipline is good for him.”
Names have been withheld.
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.
Debt management plan
Not to be confused with a consolidation loan or bankruptcy, a DMP is a service offered by a specialist debt management company that will negotiate with your creditors to change the terms of how they get their money back. The debt company will renegotiate your debt repayment terms and then deal directly with your creditors on your behalf, and you then pay the debt management company, which passes the money to your creditors minus its initial and subsequent monthly fee. This can be as high as 20%, which means you’ll pay down your debts slower than you thought.