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The billionaire bank of mum and dad

While parents and grandparents were already property financiers before the pandemic, the period since has seen far more support for the next generation. But does this support have long-term, unforeseen ramifications?
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Published 9 September
5 mins

The Bank of Mum and Dad has long been in the list of top lenders for millennials and Generation Z property buyers. It’s at the top end of financial support that starts with paying for big family meals out. Whether it was due to COVID-19 allowing many people to save money they would have otherwise spent on holidays, or a change in priorities for parents who saw their children suffer in lockdown in flat shares with no outdoor space, parents have been joined by grandparents looking to help out

As a result, some estimates state that as much as £8 billion has been gifted by the older generations to help out their loved ones, an increase of 44% over the same period in 2019. Another estimates that gifts from parents, grandparents, friends and relatives were behind over half of 2020’s house purchases among the under-35s.

Whether it is gifting up to £12,000 as a lump sum, which can be given due to the allowance linked to inheritance tax (i.e. the £3,000 per parent or grandparent for 2020 and 2021, if the previous year’s allowance is able to be carried over), or gifting out of regular income, many relatives should be cautious as they may find their generosity creates financial difficulties for themselves in later life.

This longer term impact is because parents – even if they are funding the next generations’ needs from a variety of sources – are not looking at the long-term ramifications of that support. Although the use of cash savings, borrowing against their own homes, or withdrawing money from their pension plans are all possible, there is an opportunity cost to this funding. It has the potential to cause problems for future financial and retirement plans, not least because we are all living longer and annuities are no longer an automatic choice.

Apart from the general risks linked to loan repayments, as interest rates are only likely to go up, taking money from your investment portfolio means money is not there for your future. You also lose out on any future growth that money may have enjoyed and the compounding benefits that investments typically carry, as well as any other investment income from bond coupons or equity dividend payments. The potential rates of return on investments are generally higher than the return on cash, although it is always worth remembering that markets can go down, as well as up, and you may not get back all of the original amount you invested.

Meanwhile, accessing the 25% tax free allowance from your pension pot – which you can do from the age of 55 – may mean you don’t achieve all of your retirement goals. This is because you are effectively hit twice by removing the money: once because the money is not there to grow and, secondly, because that growth cannot compound. More importantly, accessing your pension may also mean that the amount you can pay in (while still enjoying the government’s tax incentives) reduces from £40,000 a year to just £4,000. This lower tax support may mean you need to put back your retirement date to be able to fully enjoy the life you envisage throughout retirement.

Grandparents should also be aware that gifting money and not living for another seven years would mean the gift is outside your estate for inheritance tax (IHT) purposes. As such, if you are only giving to one or two of the next generation, you should document any gifts with a letter so there is a formal record for the executors of your will to refer to in the future for IHT purposes, especially since the nil-rate band (the tax-free threshold before IHT applies) has been frozen at £325,000 per person until 2026. Without this, other heirs may be forced to cover the tax bill from the estate and lose out financially versus the first recipient(s).

The good news is there is an alternative for parents with investable assets over £1 million as they can access the bespoke lending options available through private banks. Not only can loans be secured against your property and/or investment holdings, with the right advice, but the support you receive ensures you would understand the full implications of any decision and the impact it will have on your long-term financial goals. As a result, you can retain your capital, continue to benefit from your wealth and help your loved ones with their more immediate needs.

What are the options?

As private banks operate on a more personal case-by-case basis, they can offer a much more flexible approach for larger loan amounts, usually over £250,000. Their more tailored service often includes a dedicated relationship manager, who will take the time to understand your current financial position, and any long-term plans, before providing the most efficient outcome for you.

They are not constricted by tick boxes or the standard 25-year repayment models and can offer a wider range of options. For example, much shorter repayment terms, interest only loans, or scheduled repayments that can be linked to the planned release of funds in the future. However, it is still important to remember that if you don’t keep to the agreed repayment terms, the property may be repossessed.

Last but not least, loans with private banks can also be agreed relatively quickly, particularly when there is a long-standing relationship in place, which allows for a speedy response when your child/grandchild finds the right property. This, in turn, is advantageous when negotiating on a property which has seen a lot of interest. Bespoke lending can also raise cash against any investment portfolios (known as Lombard loans) you may have, provided the bank has custody, which can be particularly quick to finalise. This means they can make swift, yet carefully considered, decisions to meet an immediate need for cash, without you having to sell any of your investments.

A win for you and your family – in the short term and the longer term.

Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand how we can help them help their children, or call +44 (0)1624 645000 to speak to our client services team.

If you would like to find out more about how we can help clients manage their wealth, please contact us on the same number as above, or complete a form using the links towards the end of the page.

Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rates also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or structure is referred to for information only and are not intended as a recommendation, not least as it may not be suitable. Your home is at risk if you do not keep up payments on a mortgage or any other loan secured against it. You should always seek professional advice before making any financial decisions.

about the author

Andrew Halsall

Andrew Halsall

Andrew heads up the Isle of Man private banking team. He joined the bank in 2005 and has over 30 years’ banking experience. He looks after a portfolio of domestic and internationally-based clients, working closely with them, and their professional advisers, to meet their wealth management, succession planning, pension and lending needs.

 

Andrew is a Chartered Wealth Manager and a Fellow of the Chartered Institute for Securities & Investment.

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