Loans from family are now necessary to help young people get on the housing ladder, but millions of pensioners could end up poorer as a result
The generosity of the 'Bank of Mum and Dad' could leave millions of pensioners facing poverty when they retire, new research suggests.
Britain’s over-55s, who are gifting money using savings and even pensions to help their family onto the housing ladder, face an uncertain retirement, according to Legal & General.
It says the average Bank of Mum and Dad contribution has risen by more than £6,000, to £24,100 in the past year – making it the equivalent of a top 10 UK mortgage lender.
While more than half used money from their cash savings, others are using pension freedom rules introduced in 2015 to pass on their wealth.
The research found that one in 10 of the over-55s is cashing in a lump sum from their pension savings to help their children or grandchildren buy a home. Meanwhile, 13% are using their pension drawdown or annuity income.
Biggest mortgage lenders in 2018
1. Lloyds Banking Group £42.5 billion
2. Nationwide £35.7 billion
3. Royal Bank of Scotland £30.5 billion
4. Santander UK £28.3 billion
5. Barclays £23.1 billion
6. HSBC Bank £21.5 billion
7. Coventry Building Society £9.2 billion
8. Yorkshire Building Society £8.7 billion
9. Virgin Money £6.8 billion
10. Clydesdale Bank £5 billion
Source: UK Finance 2019
The research, which questioned over 1,600 people aged over 55, revealed that “digging ever deeper” into their retirement savings is leading some older people into a more uncertain retirement.
Over a quarter (26%) of Bank of Mum and Dad lenders say they are not confident they have enough money to last retirement after helping their loved ones and 15% have had to accept a lower standard of living. A small number (6%) are even choosing to postpone their retirement.
Equity release – unlocking the value of your home by borrowing against the property – was the third most popular source of support for helping family members get a foot on the property ladder.
Chris Knight, chief executive of Legal & General Retail Retirement, says: “Thousands are still dependant on the Bank of Mum and Dad to take their first or next step on Britain’s housing ladder. The generosity of parents and grandparents is inspiring, but many are making big financial decisions without adequate planning or professional advice.
“Retirement is much longer, and much more varied, than it used to be. Gone are the days of ‘once and done’ retirement decisions. Informed choices in the run-up to, and at the start of, the retirement journey can make a huge difference when it comes to being able to fund the retirement people really want.”
The dangers of pension pot withdrawal
Pension freedoms were introduced in 2015 and allow anyone over the age of 55 to take some, or all of their pension, as a lump sum through drawdown, with the first 25% paid tax free.
The latest figures from HM Revenue and Customs show that the average pension withdrawal in the UK is £7,254.
With the average pension pot of those entering drawdown being between £80,000 and £123,00, that puts the average withdrawal rate at between 6% and 9% per year.
This figure is way above the recommended 4% figure deemed sustainable over the long term.
According to research from Addidi Wealth Management based on data going back to 1900, there is a 25% likelihood that a withdrawal rate of 4% will completely deplete a pot in 30 years.
How to better manage your pension pot
According to 7 Investment Management (7IM), there are four strategies that retirees can use to better manage their cash flow:
Consider whether you need to withdraw anything at all from your pension pot. Just because it becomes available, it should not necessarily be used. Pensions are a tax-efficient way to pass assets on to the next generation, so consider other forms of savings or income first.
Don’t overlook annuities, largely forgotten about since pension freedoms was introduced. According to 7IM: “Annuities can still play a crucial part in managing your retirement income, as they promise a regular income for the rest of your life.”
You may want to consider allocating just a section of their pension to an annuity, to cover ‘essential’ expenditure.
Stay invested. A common mistake is to go into cash too quickly in order to reduce market risk. That, however, introduces a new risk: inflation.
Interest rates are not expected to rise above inflation anytime soon, meaning that withdrawing your pension and placing it in a savings account means that it will be eroded in real terms over time.
7IM recommends keeping an eye on your portfolio performance and adjusting your withdrawals accordingly. “If in the first year the value of your portfolio goes up 7%, then it might be sensible to withdraw only 4%.
If in the second year, you return 8%, then you might want to withdraw 5% or even stick with just withdrawing just 4%.” The point is to remain flexible and try to keep withdrawals below annual returns.