Retirees Risk Financial Security to Fuel ‘Bank of Mum and Dad’ Housing Trend

  1. The problem: Around 20% of retirees in the UK are taking money from their pensions to help their younger family members to buy houses. This phenomenon, often referred to as the “Bank of Mum and Dad,” has been growing recently, with a 10% increase this year amounting to £6.3bn, based on a study by Legal & General. On average, each contribution is £24,100 but this number rises to £31,000 in London. This is causing retirees to be concerned about their own financial future and retirement plans, and in some cases, forcing them to continue working longer than intended.
  2. The cause: The most common method of contributing is through cash savings, but a significant number of people are utilizing “pension freedom” rules to pass their pension wealth to younger generations. One in ten are cashing in their retirement savings to offer lump sums, and another 13% are taking some of their pension investment or annuity income to contribute.
  3. The consequences: In 2019, around 260,000 properties were bought with family financial support, which is about one in five homes (two in five in London). However, this trend is starting to decline as many are becoming concerned about their own financial future. A quarter of those surveyed expressed a lack of confidence in their financial security in retirement after helping family members, 15% have had to lower their standard of living, and 6% are having to work longer.
  4. Pension Freedoms and their implications: Since 2015, individuals over the age of 55 have been able to access all of their pension money in one go, which is a part of the “pension freedom” mentioned earlier. This has resulted in about £22bn being withdrawn over the past four years. However, for those with defined benefit or final salary pensions, they first need to transfer out of these schemes to take advantage of these freedoms. This type of pension transfer has increased, with more than 200,000 pension transfers in 2018-19, twice the number from the year before. These transfers were worth £34bn, two-and-a-half times the value from the previous year.
  5. Worrying signs: The regulator, the Financial Conduct Authority, is concerned about this trend, as final salary pensions are generally safer and inflation-protected. They are keeping a close eye on advisers who recommend savers to switch out from them.

In summary, the desire to support younger family members in buying their own homes is leading many retirees to dip into their retirement savings, leading to concerns about their own financial future. This trend has been facilitated by pension freedom rules introduced in 2015, but this might have implications for the financial security of retirees. It’s a delicate balance between helping loved ones and securing one’s own financial future.