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Bank of Mum and Dad bailing out adult children in cost of living squeeze

The number of young Britons relying on the Bank of Mum and Dad is set to surge over the coming months with many struggling due to rising living costs.

One in four over-50s expect to support their adult children financially through the cost of living crisis, according to new research by Saga.

Almost two thirds believe the current crisis will affect their children’s finances more than the Covid-19 pandemic due to rising bills, lack of savings and increasing rent and mortgage payments.

 Bank on mum: three in 10 parents have already gifted money to their adult children in order to help them through the cost of living crisis.

As of April, inflation hit a 40-year high of 9 per cent. This means the ‘real’ value of £10,000 a year ago would have shrunk by £900.

However, while prices are up across the board, young adults will likely be feeling the pinch even more, given that many are renting.

On top of energy prices, rents are up 11 per cent year-on-year outside of London, whilst in the capital rents are up by a whopping 14 per cent.

Saga’s analysis also chimes with separate research carried out by the DIY investment platform, Interactive Investor. 

It similarly found that a quarter of parents are worried about their adult child’s ability to stay financially afloat amidst the cost of living crisis, with three in ten having already given their children financial support as a result.

40-year high: Inflation has hit 9% meaning the value of peoples savings is being eroded in real terms.

40-year high: Inflation has hit 9% meaning the value of peoples savings is being eroded in real terms.

How are parents planning to pass on wealth?

Many over-50s are reevaluating their inheritance plans, according to Saga, with a quarter saying the cost of living crisis has changed how they plan to share their estate with their family.

Roughly one in 10 over-50s gifted money during the Covid-19 pandemic. Now, 15 per cent say they will do so due to the cost of living crisis. Typically these gifts will amount to 9 per cent of their total wealth.

Parents can gift up to £3,000 each year without any threat of incurring inheritance tax in the future.

Outside the £3,000 gifting allowance, parents can make gifts of any size (known as potentially exempt transfers) and as long as they live for at least seven years after handing it over, it falls outside of their estate for inheritance tax purposes.

If they die before the seven years are up, and their estate is subject to inheritance tax rules, they will have to pay tax on some of this.

Years between gift and death Tax paid
Less than 3 40%
3 to 4  32% 
4 to 5  24% 
5 to 6  16% 
6 to 7  8% 
7 or more  0% 

However, not all parents are in a position to help their children, with many also under pressure from everyday bills and the cost-of-living crisis.

Although two-fifths of parents are open to the idea of gifting financial support, they are simply unable to do so, according to research by the mortgage lender, Generation Home.

Saga’s study also found that 5 per cent of parents aged over-50 are considering equity release, rising to 13 per cent for those aged over 80, with the main reasons being to release funds to support family as a result of the cost-of-living crisis.

Equity release unlocks the value built up in your home, allowing you to access it in the form of tax-free cash.

This is then repaid through the sale of your property when you pass away, go into long-term care or sell the home for another reason.

Lifetime mortgages are the most popular type of equity release product, and are available to homeowners who are aged 55 or over.

Homeowners can opt for a drawdown lifetime mortgage or a lump sum lifetime mortgage.

Drawdown equity release mortgages allow you to take cash out of your home as and when you need, rather than in a single lump sum.

Lump sum equity release mortgages allow you to access all of the cash from your home in one go.

Equity release allows homeowners to avoid having to make monthly payments, unless they choose to, as the entire balance can be repaid when the home is sold.

If you choose to make no interest repayments the unpaid interest is added to the loan, meaning the size of the loan will increase over time.

That means that equity release leaves less for your loved ones as an inheritance, so it may be worth looking at alternative ways to raise income.

Alternatively, you can opt for products which allow you to pay the interest each month. There are also products that allow you to pay off both the interest and the loan amount each month.

Equity release unlocks the value built up in your home, allowing you to access it in the form of tax-free cash.

Equity release unlocks the value built up in your home, allowing you to access it in the form of tax-free cash.

According to Saga’s own data, the average amount of equity drawn down by its equity release customers has risen by 12 per cent since 2020.

The decision to release cash from your home should never be taken lightly.

There will typically be a set-up cost, whilst interest on the loan will roll up need repaying when the property is sold. The longer someone lives, the more the interest will cost. 

Therefore, it’s always best to get financial advice before going ahead as you need to be certain that you’ll have enough money in retirement.

There may also be a better option. For example, selling up and downsizing to a smaller property may free up cash without any interest payments or charges attached.