PropertyOct 24 2017

How to advise the Bank of Mum and Dad

  • Learn about how advisers can help parents pass down wealth
  • Gain an understanding of the financial challenges facing young people
  • Grasp the potential implications with gifting
  • Learn about how advisers can help parents pass down wealth
  • Gain an understanding of the financial challenges facing young people
  • Grasp the potential implications with gifting
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How to advise the Bank of Mum and Dad

The next 10 years saw a sea change in the property market, largely powered by banks taking a more flexible approach to lending. A dip followed the 2008 crash, but prices quickly resumed their rapid climb in many parts of the country. 

According to data compiled by the Financial Times, London house prices have risen almost 80 per cent in the nine years following the crash. Even the average UK property value has tripled in 40 years. As a result, more adviser clients then ever are starting to look at offering their children material financial assistance.

“I’m seeing this in nearly every case that I’ve been dealing with as a major concern,” says Peter Savage, an adviser at Fairstone. He notes that gifting now forms a fundamental part of retirement planning – often at the expense of personal goals. 

“Previously, it might have been about the level of income they wanted to take and potentially extravagant purchases such as buying a boat. It’s not anymore. They’re giving up part of their retirement to be able to help their children,” Mr Savage adds.

Transferring DB transfers

Research by insurer Legal and General shows the extent of parental intervention. The report states that parents, family and friends will gift or lend £6.5bn to help loved ones on to the property ladder this year, up 30 per cent from 2016. The figure puts the Bank of Mum and Dad on a par with the UK’s ninth biggest mortgage lender.

Assistance is not solely limited to property purchases. The report states that parents will fund more than £2.3bn in rental payments this year, with 9 per cent of tenants set to receive help from family and friends.

The test for parents is providing assistance without detriment to their retirement. One challenge is having sufficient income or capital to gift. According to Mr Savage, a growing number of defined benefit pension transfers are being made partly with this motivation in mind.

“[Clients for whom transfers are deemed appropriate] can help their kids initially because they’re getting access to a larger amount and larger tax-free cash,” he says. 

“They can also help them on death as there’s a pot left over that they can either access immediately or leave until they retire.”

Table 1: Homeowners receiving assistance towards their purchase

AgeCurrent homeowners (%)Prospective homeowners (%)
Under 35      6252
35-443438
45-541831
55+620
All ages2642

Survey of 1,000 adults. Prospective homeowner figures based on expectations.
Source: Legal & General. Copyright: Money Management

Potential pitfalls

Clarifying the nature of a client’s generosity to their offspring is also important. A report from Royal London has identified several potential hidden costs, some of which centre on whether financial assistance takes the form of a loan or a gift.

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