Are grandparents risking their own financial future?
Grandparents have often been known to help out with childcare and contributions to the piggy bank but a string of reports provides mounting evidence of the increasing reliance on them to hand over a stack of cash towards university fees and other expensive life stages.
The majority are dipping into their retirement income to help out, with nine out of 10 grandparents having given some form of financial help to their grandchildren in the past two years, either as cash or loans, according to research from retirement specialist LV=.
The average amount given per grandchild each year is £300, with some contributing as much as £50,000 in total towards university fees, deposits and holidays. Around half are planning to increase the amount they hand over in the next five years.
The rising cost of living is the reason three-quarters say that they are giving their grandchildren money, with one in 10 saying that their grandchildren would struggle without this financial help.
Separate research from life insurer MetLife reveals that more than one in three of over-65s have paid off debts of more than £2,000 for children or teenage grandchildren. Meanwhile, a report from Prudential says this year's retirees with dependants are providing financial support for two other people on average – most likely to be children or grandchildren.
Among the first to consider the "bank of gran and grandad" trend at the end of 2013 was the International Longevity Centre - UK, alongside equity release providers Key Retirement Solutions and Partnership. It found that across England grandparents gave a total of more than £333 million to their grandchildren in 2010 alone.
At the same time, the Institute for Fiscal Studies said living standards for those considered to be in the prime of their working lives were now dependent on wealth passed down the generations.
The boom in reliance on grandparents is expected to increase over the next decade due to increasing longevity. Key Retirement Solutions found that although just under 3% of grandparents have helped fund education costs for grandchildren, the proportion expecting to do so will increase to 13% in the next 10 years.
So how can grandparents help out without feeling under pressure and jeopardising their retirement income? One option is to set fixed, annual or monthly contributions, making it simpler to factor this sum into financial planning.
Ray Black, financial adviser and founder of Money-minder.com, says: "This route will help the grandchild to manage regular income and budget, a life skill that is critical for them to learn if they are to be good money managers in the future."
However, the downside is that it provides them with a regular income to spend on whatever they feel is important at that moment.
"Depending on age and maturity, they might not necessarily be the things the grandparent would like to see the cash spent on," says Black.
Alternatively, grandparents could offer a lump sum at a particular life point. "You can simply say that you'll give them money at 21 but that's all there is," says Black. Or offer to help out with one-off expensive stages such as a wedding, buying a first car or a deposit to get on to the property ladder when the time comes.
Consider your own future
Patrick Connolly, a certified financial planner at Chase de Vere, warns that while grandparents may want to help as much as possible, they mustn't do this at the expense of their own standard of living.
"This is particularly important when you consider that many people will live far longer than they expect, and so may need to have more money put aside to pay for their own livelihoods," he says.
This is a message underlined by Debt charity StepChange, which has also urged older people to think about their own future before bailing out their children and grandchildren. A spokesperson says: "There are a lot of costs associated with getting older, and it is crucial that these are factored in to any decision to hand over money."
Most importantly, stand your ground. "If you can't afford to contribute, say so," stresses Black. This way, your grandchildren learn that if they really want something, they'll need to go out of their way to earn and save more money to get it. "And that is one of the most valuable lessons grandparents and parents can teach – the need to be financially independent," he adds.
An alternative is to split the contribution with your grandchild. If they are unable to stump up their share, you could set up a loan agreement with them, to pay back the sum gradually. For example, the terms of providing a £3,000 lump sum needed for buying a car could be that they need to pay back the 50% contribution towards this over 15 months at a rate of £105 per month. "This includes an interest charge of £75, and that's to help them realise that borrowing money is not free," says Black.
A term to describe financial products or ‘plans’ that help older homeowners turn some of the value (equity) of their homes into cash – a lump sum, regular extra income, or sometimes both – and still live in the home. There are two main types of equity release: lifetime mortgages and home reversion plans (see separate entries for both). Whichever type you choose, you borrow money against the value of your property, on which interest is charged, and the loan is repaid when the house is sold after your death.