The perils of generation generous

Neil Barrow and his wife, Jackie, have given £96,000 to their four grandchildren, and there is more to come.

They save about £4,000 a year each for Lara and Dylan, both seven, Jessie, five, and Gabriel, three, and have helped their children, who are 44 and 43.

“We paid off our mortgage a long time ago and we have good pensions, so there is no obvious reason for us to hold on to the money,” said Neil, 76, a retired university lecturer. “We view it as family money — we want to use it for everyone, not just for ourselves.”

Their attitude is not unusual. One in six grandparents regularly support their adult children and grandchildren financially, according to the investment platform Moneyfarm. These grandparents will hand out an average of £71,942 over their lifetime to help with everything from mortgage payments and energy bills to holidays and pocket money. This is Generation Generous.

Across all age groups a total of £13.2 billion was given to friends and family in the 2019-20 tax year, according to the most recent figures from the Institute for Fiscal Studies (IFS). That was up from £6.4 billion in 2009-10. Older generations are three times more likely to make financial gifts than those under 50.

A quarter of people aged 50 and over had given away money in the past five years, with the average gift being £15,978, according to the insurer SunLife. Of those, a quarter had given money to grandchildren. Researchers said the most common gifts were for birthdays or Christmas at an average total of £1,688 while the average amount given for house deposits was £29,616.

Grandparents are also being relied on to pay for school fees. Some 47 per cent of parents said they had financial support from family to help with education costs, according to a survey of 885 people by the lender Premium Credit last summer. Of those, 79 per cent said the help came from grandparents.

Why so generous?

Baby boomers, those born between the end of the Second World War and the mid-1960s, have enjoyed guaranteed workplace pensions, strong earnings growth, and have seen the value of their homes rocket — all of which has put many of them in a comfortable financial position.

Average earnings grew about 60 per cent in real terms over the 1980s and 1990s — about 2.3 per cent a year — according to the IFS. That compares with average growth of 10 per cent over the past 20 years — about 0.5 per cent a year.

Land Registry figures put the average house price in 1985 at about £27,800, about 3.7 times the average annual salary, according to Nationwide Building Society. Today it is about £280,700, some 6.1 times what Nationwide says is the average wage.

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And generous final salary pension schemes have ensured comfortable retirements for millions. In 2006, 3.5 million people were saving into defined benefit schemes, which offer guarantee incomes, according to the Office for National Statistics (ONS). By 2022 this was down to less than 0.9 million.

“This generation of grandparents are probably the wealthiest we’ve ever seen,” said David Sturrock from the IFS. “Because of this, they may feel like they are more able to give support to their children and grandchildren.”

Neil and Jackie, 73, started saving for their grandchildren when the first one arrived seven years ago. Neil did not want to set up Junior Isas for them because the child can take full control of the account at age 18 and he was nervous about what they might do with a large sum of money.

Instead he has set up four adult Isas — one in the name of each parent — into which he pays £4,000 a year. He plans to withdraw money from all four accounts and split it equally between the grandchildren when they are older. The pots are worth about £140,000 in total, but he hopes they will be much bigger by the time they hand them over to the children.

“We want it to go on something sensible: the sort of things we have in mind is higher education, buying a house, or setting up a business, but it depends on their circumstances,” he said. “Hopefully we’re going to live for another 20 years and this means we will be able to see our family having a nice life with the money.”

What are the risks?

Experts warn that without careful planning, grandparents could put their own comfort at risk by being too generous.

About 51 per cent of grandparents have dipped into their savings to support younger family members, according to a survey by Moneyfarm. Some 30 per cent had reduced their spending to offer help.

“If grandparents aren’t careful, there is a risk that they may be in a position where they need to be supported financially in later life,” said Sarah Coles from the investment platform Hargreaves Lansdown. “It’s really important to factor in how much money you may need for retirement if you’re helping out younger family members now.”

How much you need will depend on the type of lifestyle you want and how long you will live for.

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The Pensions and Lifetime Savings Association, an industry body, estimates that a single person with no housing costs needs £43,100 a year of post-tax income for a comfortable lifestyle in retirement, which includes money for luxuries like several foreign holidays a year and regular beauty treatments. A couple would need £59,000 a year of post-tax income between them.

Later life care is an important consideration. Care home fees are about £1,071 a week on average, according to latest data from the ONS — about £51,670 a year.

“While it’s tempting to help the next generation, this should not be at the sake of your own financial security and independence in later life,” said Gianpaolo Mantini from the wealth manager Saltus.

If you are giving away money, watch out for taxes. You can give away as much as you like free of inheritance tax (IHT) as long as you live for seven years after, otherwise the gift will be included as part of your estate for IHT purposes.

There are allowances for gifts made within that seven-year window though: you can give up to £3,000 a year in total inheritance tax-free; and you can give as many gifts of cash or assets worth £250 as you like, as long as you haven’t used another gift allowance on the same person that year. You can also give £5,000 to a child for their wedding, and grandparents can contribute £2,500. This can be given on top of the annual £3,000 exemption, so you could make an £8,000 wedding gift.

Consider non-financial gifts. Helping with childcare so that parents can avoid nursery fees could save huge amounts. At an average of £49 a day, looking after grandchildren for one day a week could save £2,358 a year on nursery fees. This could also help you to boost your state pension, because if you are below state pension age and care for grandchildren under 12, you can claim childcare credits, which could fill in any gaps in your national insurance record.

You need 35 years of national insurance contributions to get the full new state pension, which is worth £11,502 a year. An extra year of contributions can add up to £302.64 a year to your state pension.

‘We can’t give money, but we help with childcare’

Zoe and John Stratford can’t afford to give their children and grandchildren financial help, so they take on some of the childcare instead.

Zoe, 60, a former foster carer, and John, 61, a former computer analyst, stopped working in 2020 but the cost of retirement has taken them by surprise.

“We had no idea how much things would cost and money is tighter than we expected,” Zoe said. They couple, who are mortgage-free, have an income of £1,600 a month from John’s workplace pension and are not yet able to claim a state pension.

There is little left over after paying the bills and they are considering cancelling their private medical insurance, which costs them £200 a month.

“I’d love to be able to financially help both of my children out — if we had the money we definitely would,” Zoe said. “But we help out with our time instead.”

The Stratfords take their grandchildren — George, five, and Joey, three — to nursery and school and pick them up regularly. They look after George during school holidays and Joey sleeps over every Wednesday night.

“We’ve definitely had it easier than our children,” Zoe said. “They don’t have the spare cash that we had at their age. We help our kids out because we want to, and we know how hard it is.”