The Bank of Mum and Dad: How Can You Safeguard Your Child’s Financial Future?

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AS A PARENT, you could be forgiven for thinking that by the time you have put your children through their primary and secondary education, coughed up university fees, and watched your grown-up kids graduate and get started on their chosen career path that your income will finally become yours again to spend as you wish. Unfortunately, evidence suggests that parents are increasingly having to support their children financially throughout their 20s, 30s, and even 40s.

Young people have it tough right now, especially in the UK. House prices are still soaring, particularly in London and the South East. With wages stagnating over the longest period in at least 70 years, the Institute for Fiscal Studies (IFS) predicts that real wages in 2021 will be lower than in 2008. With high rents to pay, student loans to pay off, and an increasing cost of living, saving for a deposit on a property is simply beyond the means of many. Indeed, the IFS has spelt out brutally just how hard it is, saying, “Home ownership among young adults has collapsed over the past 20 years, particularly for those on middle incomes.”

That is a bitter pill to swallow for many of us Brits who have historically been a nation of homeowners – ‘an Englishman’s home is his castle’ – which is why many who are being priced out of the market are resorting to the so-called Bank of Mum and Dad.

According to research by Legal & General, 317,000 housing transactions in the UK this year will involve some form of parental contribution. That is 27% of home purchases, up from 25% in 2017. However, parents are clearly starting to feel the pinch, as the average contribution is predicted to fall from £21,600 in 2017 to £18,000 this year. Nevertheless, that still leaves parents making contributions totaling £5.7billion. If they were a mortgage lender, collectively parents would be in the top 10!

If you are embarking on parenthood, or even if you are some years into it, that may well strike fear through your heart. Just how long will you have to continue to support your children financially?

I always recommend that new parents start an education fund for their children as early as possible. If you’re a new parent and haven’t yet done so, don’t worry – it’s never too late! However starting to put money aside as soon as you can is a good idea so that you can benefit for as long as possible from the power of compound interest.

There are products on the market that are much more efficient with your money than savings accounts, and I would recommend that you research these and look into the options that will make your money work as hard as it can for you. Your financial adviser should be able to provide some expert guidance in helping you choose appropriate products for your specific circumstances.

The benefit of building capital through regular saving is that by the time your child reaches the age of 18, you will have a significant pot of cash. In an ideal scenario, that will be enough to see them through their tertiary education debt-free and give them a deposit to put down on their first home. Of course, that’s the gold standard and not something that is achievable for all parents, but any contribution your savings make to university fees will reduce the debt burden on your child and give them an advantage once they start their career. Instead of paying off debts each month, your child can start their own savings plan to save for a deposit to get them on the property ladder.

If the savings boat has already sailed for you, there are still other options available to parents wanting to help their children buy a home. These include equity release, remortgaging, downsizing, or gifting a deposit. One word of warning though, do not be tempted to sacrifice your retirement saving for the benefit of your children! It is essential to prioritize your pension to safeguard your own financial future first. The last thing that you want is to become a financial burden to your children later in life.

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Sam is a UK-qualified Independent Financial Adviser and strives to raise the standards of international financial planning in Malaysia. He has been based in KL since 2009 and represents Infinity Solutions Ltd in partnership with UK-based Wealth Manager – Tilney Group. You may direct any inquiries to [email protected] or call +6017.3499 686

This article was originally published in The Expat magazine (July 2018) which is available online or in print via a free subscription.

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