Feeling the squeeze
The Bank of Mum and Dad continues to play a major role in the housing market, but thousands of over-55s are feeling financially vulnerable as a result.
Parents and grandparents across the UK are digging deep into their pension pots to support loved ones, balancing the ambitions of young relatives with their own retirement goals. Consequently, over a quarter of those aged between 55 and 64 are accepting a lower standard of living, according to a new study by Legal & General and the Centre for Economics and Business Research.1
The study shows that more than 50,000 property transactions this year will be funded by parents cashing in their pension pots to provide a lump sum for a deposit, and nearly 23,000 supported by retirees using their annuity income.
The Bank of Mum and Dad is even using equity release to help the housing needs of younger family members. Nearly 44,000 housing transactions have been partly or wholly supported by equity release this year, while a fifth of parents lending cash for their kids’ deposit have downsized their own home to do it.
The Bank of Mum and Dad is expected to be the equivalent of a £5.7 billion mortgage lender this year, responsible for more than one in four UK housing transactions.
The study found that one in ten parents and grandparents said they felt less financially secure as a result of providing financial assistance to loved ones, and 4% have actually postponed their retirement so that they are able to fund the loans.
Worryingly, the research also found that more than three-quarters did not speak to a professional adviser or even seek information online before offering help.
“This generation is helping family or friends onto the housing ladder, but they don’t necessarily have the wealth to do so without impacting their own retirement plans, and they should get advice to make sure this won’t leave them short of funds,” says Chris Knight, CEO, Legal & General Retail Retirement.
“[It] means getting people thinking about retirement income earlier, helping them build their retirement plan and laying out all the options available to them. If we can do this, we can help people to be this generous without leaving themselves short – helping their family onto the property ladder, but also ensuring they have the best retirement they can,” says Knight.
While dipping into your savings may seem tempting, there are other ways to help a child onto the housing ladder. For instance, relatives may be able to apply for a joint mortgage with a child, or ringfence invested capital in an account which can help to reduce the child’s monthly mortgage repayments. As such, benefactors can stay invested and continue to plan for their own future, while providing mortgage assistance to their young relative.
Property wealth has the potential to be a transformative force for so many young people. But with so many pitfalls to avoid and finer tax issues to consider, it’s always a good idea to take financial advice. That way, you can ensure that you can help loved ones without putting your own financial security and retirement comfort at risk.
The home on which the mortgage is secured may be repossessed if repayments are not maintained.
1 The research was compiled using original survey data as well as existing data sources relating to transaction levels. The survey work was carried out by YouGov and Censuswide. For the borrowers the total sample size was 1,002 adults. Fieldwork was undertaken between 5th - 11th April 2018. For the lenders, total sample size was 2,010 adults. Fieldwork was undertaken between 22nd February – 6th March 2018.