Interactive Investor

What the Bank of Mum and Dad needs to do right now

12th January 2022 10:43

Katie Binns from interactive investor

Parents are having to help their kids out with a lot more than first homes. Katie Binns suggests how they can prepare.

Parents may not be crooning We all need somebody to lean on”, as Bill Withers did in Lean on Me, but they might as well - when it comes to their kids anyway.

Research from interactive investor reveals the Bank of Mum and Dad is being called on to finance much more than home deposits. Alongside boosting deposits (42%), many parents are helping with university costs (58%), buying a car or covering motor-related costs (46%) and, in some cases, contributing to adult childrens pensions (10%). 

The high percentage of older people helping out their adult children reflects a depressing reality: that it is difficult, if not impossible, to manage these life milestones without any parental help,” explains Becky OConnor, head of pensions and savings at interactive investor.

We are indeed living in extremely squeezed times. Not only are we all dealing with inflation, a spike in the cost of living and upcoming tax hikes, but the Bank of Mum and Dad is at growing risk of default, according to interactive investor’s Great British Retirement Survey. Worryingly, one in five (21%) parents still working have drawn some or all of their pensions tax-free lump sum to help their offspring buy a home. It just shows how much some adult children are leaning on their parents.

How can parents help their kids?

If youre a parent in a position to save for your childs future and you have some time on your side, you could start investing with a stocks and shares individual savings account (ISA). As with any significant financial goal, the earlier you start, the easier it is. A longer time frame also lets you take some investment risk, because your investments will have the opportunity to ride out any stock market volatility.

The alternative, saving money in a low-interest savings account, will mean your financial efforts are eroded by inflation. According to the 2019 Barclays Equity Gilt Study, the stock market has outperformed cash in 91% of 10-year periods. This is why investing money for your childs future in the stock market might be a good option. It can certainly give you a better shot at outperforming inflation and growing your money in real terms.

What are the figures that parents need to save? Take a deep breath. Weve done some maths.

The average house price in Britain is now £272,992, according to the Halifax house price index. A 10% deposit is a huge £27,300! If you wanted to provide a good chunk towards this - say £18,000 - and had five years before your child required the money, youd need to put £265 a month in a stocks and shares ISA. This assumes an investment return of 5% a year.

If you have 18 years to save, you would only need to set aside £610 a year, or around £50 a month. (This also assumes an investment return of 5% a year.)

Want your child to know how to drive? The average second-hand motor advertised for sale in November 2021 was £17,366, according to online retailer Auto Trader. Meanwhile, the average cost of learning to drive is around £1,080.

To achieve a pot of £13,000 in five years to go towards these expenses, you need to save £191 a month. If you have 18 years to save, you need to set aside a less hefty £441 a year, or £37 a month.

Building foundations for the future

Understandably, you may want to prioritise finance for further education. Living costs for a student are difficult to calculate as they're subject to several factors. The average annual cost of living according to the National Student Money Survey currently puts it at £9,720.

Lets say you want to have £10,000 upfront for your childs first year of university or similar. If you have five years, you will need to save £147 per month. However, if you can start saving when they are born, youll only need to save £339 a year – £29 a month – for 18 years to achieve the same financial nest egg.

Its important to remember that the cost of whatever youre saving for will rise over time, so student living and learning to drive will cost more by the time your child reaches 18. For example, if we assume these costs rise by an average 3% a year, what costs £100 today will cost £116 in five years and £170 in 18.

Justin Modray, an independent financial adviser, regularly speaks to parents. The simple message when saving for children is the sooner the better, even if you start with a small monthly saving. If youre apprehensive about choosing investments, perhaps start off with straightforward index tracking funds. Its also worth using your childs Junior ISA allowance, to ensure the taxman doesnt take a cut.”

Remember, the annual allowance lets you invest £20,000 tax-free in an ISA and £9,000 in a Junior ISA, and no income tax or capital gains tax is payable on the investment returns.

Helpfully, interactive investor has recently launched ii Friends and Family, allowing its customers to gift up to five people a free subscription with ii, for just £5 extra a month. So if the Bank of Aunt and Uncle or the Godparents Treasury Services plc want to offer some financial support, they can open a general investment account and access iis full range of investments, without paying iis monthly platform flat fee. Singing Lean on Me is optional.

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