The cost of keeping our kids financially secure as adults
AS a parent, you've probably seen articles in the press about the spiralling cost of raising a young child, putting them through two schools, then helping them through college as well.
But have you ever considered the cost of raising an adult? Continuing to help our children with money after they are adults is an emerging phenomenon that can do serious damage to your pension savings - especially if you proceed without financial advice.
Recent research is showing that when we get into our 50s, our children are often starting out on their careers, and are still facing financial challenges we want to help them with.
Legal & General said recently that one in five of over-55s feel responsibility to help, and are digging deep into their cash reserves and leaving themselves short as a result. In fact, a quarter of those who support their adult child in this way leave themselves unsure of how they will fund their retirement. Parents also say it prevents them from putting money aside to plan for any healthcare needs they may have in old age.
Furthermore, 15 per cent said they have had to accept a lower standard of living after helping their adult children, while a small number (6 per cent) are even choosing to postpone their retirement.
These 50-somethings are affectionately known, of course, as ‘The Bank of Mum and Dad' (Bomad for short) and their services are drawn upon mainly when their children are attempting that leap that has become much more difficult in recent years: the leap on to the property ladder.
Now, this is not an article about mortgages and house deposits – it's about the effect on parents' pension provision, and how savings are being depleted as we empty our personal coffers to put a roof over our loved one's heads.
Legal & General's findings showed that in 2019, the average Bomad contribution has risen by more than £6,000 over the previous year, to £24,100.
Here's the fact that stunned me: that makes Bomad one of the top 10 mortgage lenders in the UK – albeit an unofficial one. Mums and dads handed over £6.3bn last year alone.
Let's look at how they're doing it - but not before we note that 44 per cent of Bomad admitted they made their decisions with no professional financial advice whatsoever.
In the struggle to help their children out, parents showed how their retirement planning is seriously impacted. More than half of parent lenders are using cash (53 per cent), nine per cent are cashing in lump sums from their pension savings, seven per cent are using pension drawdown, and six per cent are passing on some of their annuity income.
Realising cash from pension savings and pensions drawdown is a minefield, fraught with many dangers, including inadvertently incurring a massive, unexpected and possibly avoidable tax bill. Legal & General have always taken the same line with their customers: you'd be crazy to go it alone on this, it's essential to speak to a qualified expert.
Or as they put it in the above research: “Legal & General also wants to encourage more over-55s to seek professional advice, before using their retirement savings to help loved ones.”
In today's complex financial landscape, “retirement is much longer, and much more varied, than it used to be. Gone are the days of ‘once and done' retirement decisions.”
:: Michael Kennedy and Shaun Doherty are independent financial advisers and pensions specialists, and can be contacted on 028 71886005. Further information on Facebook at “Kennedy Independent Financial Advice Ltd” or via www.mkennedyfinancial.com