From help with university living costs to a helpful leg up onto the housing ladder, the so-called ‘bank of Mum and Dad” is increasingly expected to do at least some of the financial heavy lifting when children leave home and begin to make their way in the world. But according to a new report from peer-to-peer lending platform, Zopa, many parents are failing to put money aside to help the next generation. Some because they find it impossible to save, others because they want to encourage self-reliance. But as the peer-to-peer lender sees it, low-interest rates are also acting as a disincentive.
The so-called millennial generation arguably faces a tougher set of financial challenges than their immediate predecessors – not least in terms of getting onto the property ladder. In the wake of the financial crisis, Mortgage lenders typically ask for a deposit of at least 5.0% and with the average price of a flat now standing at more than £200,000, that means a deposit in the region of £10,000. With wages remaining fairly stagnant and rents high, saving the initial amount required to purchase a home can be tough, especially for those who are also repaying student debt.
And as a report published in May by the Resolution Foundation think tank highlighted, the generation born since 1980 are decidedly gloomy about their financial prospects. Most expect to be worse off than their parents. That, in turn, puts pressure on previous generations to help out.
Can’t Save/Won’t Save
First the good news. A majority of parents are making an effort to save and 62% have a long-term strategy stretching over four years or more.
But Zopa’s research suggests that around 20% of parents are not saving, either for themselves or for their children. Out of that group, more than half say they simply can’t afford to set money aside. Meanwhile a small but significant minority – one fifth – say they want their children to stand on their own two feet.
As Andrew Lawson, chief product officer at Zopa pointed out, low wage growth and high inflation have made it more difficult to put money aside. However, lack of cash is not the only factor. With interest rates still at very low levels, there is perhaps very little incentive to save.
“Unfortunately, the British public will struggle to find a savings account paying out interest higher than two per cent,” he said. “And with the most recent UK inflation rate being posted at 2.4 per cent, anyone using one of these accounts as their primary “long term” savings vehicle can most definitely find a better route.”
The survey suggests that Most savers are not seeing their money grow. For instance, 50% of those questioned in the Zopa poll are using standard bank savings accounts. This compares with the 34% who use Junior ISAs (potentially offering better returns) and just 9% investing via Stocks and Shares ISAs.
So-called ‘Easy Access’ savings accounts are attractive to those who want to set money aside in a separate account while also keeping open the option to dip into the pot from time to time and get cash out immediately. However, the price for the convenience of having instant access to funds is low interest rates. Even the best performing easy access accounts offer an annual return of not much more than 1.3% and in many cases, it is lower.
“Notice Accounts” tend to offer slightly higher rates (the best is currently) between 1.6% and 1.7% but savers can’t access their money immediately.
Despite the unexciting returns, bank accounts provide a great way to get adults and also children into the savings habit. Robert Gardner is the co-founder of RedStart, a charity set up to teach young children about money. He recommends that children have their own accounts.
“Shop around. Most banks and building societies have a children’s savings account. Again a child can learn that if they save £1 a week they can have over £50 at the end of the year to buy a bigger toy,” he says.
Gardner is also keen that children learn about the benefits of longer-term savings.
“If you want to teach your children how to ‘grow’ their money and benefit from compound interest then you should consider either a Junior ISA (JISA) and invest in stocks and shares and or a pension,” he adds.
It Pays to be Adventurous
Investing in the share and bond market takes savers away from the safe comfort zone of the bank account and into the rather more volatile world of the financial markets. But according to Ben Faulkner, Communications Director for wealth management company EQ Investments, it pays to be adventurous.
“In almost all cases an investment for a child implies a long timescale. This situation is ideal for adopting an adventurous investment strategy, where you accept the greater volatility that comes with the potential for greater returns in the long term,” the spokesman says.
ISAs are an obvious first port of call. The Junior ISA (JISA) in particular has been designed to encourage young people between the age of five and eighteen (or more likely parents acting on their behalf) to save for the future. Under JISA rules, £4,260 can be saved every year and the returns are tax-free. There are risks, though. Returns on Stocks and Shares JISAs are not guaranteed and, in theory, any downturn in the stock market could mean the saver receiving less than has actually been put in. Alternatively, parents could invest in a standard Stocks and Shares or Cash ISA.
Robert Gardner urges parents not to forget pensions, which can provide huge benefits to children later in their lives.
“The advantage of a pension is you get tax relief. That’s free money from the government. Just 50p a week from birth until the age of 10 will grow to be worth over £100,000 by the time they retire. And they can’t access it and spend it when they turn 18,” he says.
There is also a new kid on the savings block in the shape of peer-to-peer lending platforms – of which Zopa is one. These platforms lend to individuals and businesses, with the money sourced from thousands of individual investors who are rewarded with returns that are higher than those offered by bank savings accounts. Zopa itself offers a fund with a 4.6% return to lenders.
So there are a lot of options to consider, each with their own characteristics in terms of the risk involved and the potential return. If the rate of return over a long timescale is the priority, Ben Faulkner says that evidence points to shares and property.
“A child’s portfolio should be invested largely in equities (shares in companies) and property, since these are the types of asset that, historically, have always produced the highest returns, over the long term.”
But the starting is a commitment to saving.