Bank of Mum and Dad at growing risk of default

by Jemma Jackson from interactive investor |

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Stretched by Covid, one of Britain’s biggest lenders is under pressure, research from interactive investor’s Great British Retirement Survey shows.

  • One in five working parents taking a tax-free lump sum from pension to help children on property ladder
  • Growing numbers of grandparents now providing free childcare (29% vs 18% last year)
  • One in five workers approaching retirement expect to delay it because of Covid-19
  • Regional differences: More than one in three Londoners want to relocate on retirement
  • Women still have poorer retirement outcomes on average
  • One in five couples have lied about money, with couples in London and Ireland leading, and couples in Wales the least likely to lie 
  • Long-term care costs a growing concern

It is known as one of Britain’s biggest lenders, but the Bank of Mum and Dad is being stretched and at growing risk of default, according to new research by interactive investor. 
 
The Great British Retirement Survey 2020 -  one of the biggest of its kind – quizzed over 12,000 UK adults at different stages of their retirement journey.
 
More than half (51%) of parents already retired had helped their children buy property – 10% by loaning and 41% by gifting money (an increase of 6% since last year). A similar number of parents yet to retire anticipate that they will have to help out if their adult children are ever to get a foot on the property ladder.
 
Worryingly, one in five (21%) parents still working who had drawn some or all of their pensions tax-free lump sum used at least some of it to help their children buy a home.
 
It comes at a time when Covid-19 has wreaked havoc on many people’s finances, with one in five (21%) workers aged 60-65 saying they expected to have to delay retirement. 
 
Moira O’Neill, Head of Personal Finance, interactive investor says: “The Covid-19 pandemic has created uncertainty for everyone. With jobs in jeopardy and incomes slashed, many are turning to their parents for help – whether it’s for a cash bailout, support to get on the property ladder or childcare. But the older generation is suffering too, with many having seen their savings rocked.  

“If the Bank of Mum and Dad was a regulated institution there would be urgent calls for a review of its liquidity and the unions would be raising the alarm about unpaid labour! Not surprisingly many older savers are feeling gloomy. Last year more than half of those still at work thought their lifestyle would improve when they retired. This year that number has halved.”

One in four (25%) of those delaying retirement thought that they would have to wait a further year to give up work. One in three (34%) expected to wait an additional two years; a further 23% thought they would have to postpone retirement for three years, 5% for four years and 14% for five years or more. One in four of those delaying retirement (24%) said they were worried that the investment losses suffered due to coronavirus would mean they would actually never be able to retire.

Rebecca O’Connor, Head of Pensions and saving, interactive investor, says: “There has been a material increase in the financial calls being made on the Bank of Mum and Dad. The average house price has risen by 1170% in the past 40 years – from around £20,000 to over £234,000 today. Parents told us time and again how they had benefited from the house price boom but were now watching their children struggling to become homeowners.

“It’s understandable that they want to help but worrying how many people have drawn on their pensions to do so. Covid has forced lots of people to reappraise their retirement plans. Many others may just not realise how weak their finances are. The worry is that many of those raiding their pensions and cash savings now to help their children will find they haven’t enough for their own needs later. We see a retirement storm brewing.”

Verbatims from the survey:

“Coronavirus has wiped out £60k of our savings in our portfolio. This was my husband’s pension pot. He has no [other] pension.”

“Coronavirus has probably knocked 25% off the value of my pension pots and investments just as I am about to start drawing money down.”

Providing childcare

Parental support extends beyond just finances, too. With the increased precariousness of the job market and households facing tighter finances, many more retired grandparents are now providing childcare (29% versus 18% last year). 
 
Increasingly, working parents now expect they too will have to look after grandchildren once they retire (36% versus 20% last year), and fewer are envisaging being able to do voluntary work (44% versus 52%) or see retirement as time to dedicate to themselves (50% versus 55% last year). 

 Regional snapshot

Scotland … is the region where respondents are most likely to… have registered a Lasting Power of Attorney (LPA) (29%)
Wales … is the region where respondents   are most likely to… say they do not plan to ever   retire (10%)
Northern Ireland … is the region where respondents   are most likely to… look after their grandchildren   (39%)
London … is the region where respondents   are most likely to… plan to move away from after   retirement (37%)
South East … is the region where respondents   are most likely to… have considered the need for   long-term care and how to pay for it (36%)
South West … is the region where respondents   are most likely to… have written a will (84%)
East … is the region where respondents   are most likely to… have bought an annuity for   retirement (24%)
East Midlands … is the region where respondents   are most likely to… view retirement as having a life   of pleasure (43%)
West Midlands … is the region where respondents   are most likely to… have a retirement pension paid by   employer’s pension scheme (70%)
Yorkshire and Humberside … is the region where respondents   are most likely to… know what their retirement income   will be (41%)
North East … is the region where respondents   are most likely to… believe retirement improves your   lifestyle (47%)
North West … is the region where respondents   are most likely to… have money to spare at the end of   the month in retirement (74%)

The research unearthed interesting regional differences, including the fact that more than one in three Londoners plans to relocate on retirement (compared to a quarter overall). Those in the South East (excluding London) are not far behind Londoners in wanting to move (33%), whilst residents of Northern Ireland, Wales and the North West of England are least likely to relocate (16%, 17% and 18% respectively). 

Rebecca O’Connor, Head of Pensions and saving, interactive investor, says: “Covid may have been an influence here, and this is obviously the area with the highest house prices. We’re seeing older people cashing in on their expensive London properties and moving somewhere cheaper to boost their pension pots. They may be looking for more bang for their buck, too – a bigger home and garden. And with younger family members unable to afford housing in London and childcare needed, many are moving to be closer to children.”

Non-retired women and men often have different retirement expectations: 

Moira O’Neill, Head of Personal Finance, interactive investor says: “We have heard some devastating stories from women this year who have been reduced to poverty by either the unexpected equalisation of the pension age, divorce or both. Women’s financial prospects and aspirations are impaired for so many reasons and they are more than twice as likely as men to have to work into retirement out of necessity. Far too many women have no idea what their retirement income will be in retirement, and they tend to be far more pessimistic about their financial prospects. It is a disgrace that one in ten women expect a household income of less than £10,000 in retirement compared to just 2% of men. We have to start lifting women’s financial expectations.” 

  Women Men
Expect an annual household income of less than £10,000 a year in retirement 10% 2%
Expect an annual household income of more than £50,000 in retirement 9% 22%
No idea what retirement income will be 36% 17%
Of those expecting to work into retirement, proportion doing so out of necessity 22% 10%
Would work in retirement for love of it 18% 29%

Particular challenges for women – pension equalisation and divorce

The 1995 law to equalise the state pension age, lifting the retirement age for women from 60 to 65 (and then again to 66), affected 3.8 million women born in the 1950s and came with insufficient notice for many. 

More than one in three (35%) of our female respondents said the levelling of the state pension age had adversely affected their finances.

Unsurprisingly, the most significantly affected age group was those aged 60 to 65, where nearly two thirds (64%) said they had been adversely affected. 44% of women in this age group have had to work for longer than they planned, and 21% said they were in financial hardship because they had not had long enough to prepare their finances. 

Divorce was identified in our survey as a major life event that had derailed retirement plans for many people. 

The Welfare Reform and Pensions Act 1999 gave former spouses rights to a share in the pension of their ex-partner but (though some will have divorced before the new law came into effect) a surprising number – 57% – had failed to discuss pensions in negotiating settlements.

The proportion who had was higher among people aged 48 to 54, and this reduced towards older age categories. Men (50%) were also more likely to say they had discussed it than women (30%), as were those with children (45%).

Later life care

A growing concern for many older people is, not surprisingly, how they will fund later life care One in four retired respondents (25%) had actively prepared for the cost should they need it. Again, this proportion rose with age, with more than one in three of those over the age of 77 having made preparations. Overall, the biggest proportion of retired respondents (52%) had not prepared but were worried about it, saying that it was on their mind.

Long-term care costs can have an enormous impact on the size of an inheritance, with the potential to wipe out a remaining estate entirely. The overwhelming desire to leave an inheritance was highlighted within our survey. More than four out of five (81%) of retired respondents said they wanted to leave an inheritance for their children or other loved ones.

The potential of long-term care costs to derail these final financial planning dreams was cited as a concern for many of our respondents. When we asked about their biggest financial worries, more than a quarter (27%) of those pre-retirement said that they were worried that the money they would like to leave to their children would go on long-term care. It was also an issue for our retired respondents, where more than one in five said that not being able to leave money to loved ones when they die was one of their top financial concerns.

Rebecca O’Connor, Head of Pensions and saving, interactive investor, says: “Individual Britons spend close to £12.6 billion a year on long-term care and that is likely to grow as the population ages. It is estimated that nearly nine million people are providing care for a loved one and many of these will be suffering impaired incomes as a consequence. The funding of long-term care continues a serious worry.” 

Secrets and lies

Almost one in five (18%) have lied to their partner about money, rising to 21% in London and Ireland, with a low of 15% in Wales. Most of the deceit involves downplaying the cost of things, but when it comes to investments specifically, 8% have a secret investment stash. Half of these said their partners were completely in the dark about their ‘runaway fund’, whilst the other half had deliberately underplayed the value of their investments. Londoners were most likely to lie about their investments to their partners (10%).
 
Women were more likely to be economical with the truth about money (22% vs 15%), mostly in relation to the price of things. 

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