IFAs should advise entire families to "ditch the embarrassment" and discuss their financial affairs together as research indicates nine out of 10 grandparents are willing to help finance a child's future, says The Children's Mutual (TCM).
Findings of the study were compiled as background research to the launch of TCM’s Growing Up Bond, which is designed as a bearer trust-based savings vehicle created to allow grandparents to put money away under terms which they set for the future of their grandchildren.
White says the bond was created on the back of feedback from financial advisers who say there is demand for a product which allows grandparents to put lump sum investments, for example, into a savings package, rather than a regular savings plan.
This is because research suggests 85% of grandparents are happy to help save for a child’s future, rather than giving the funds to their own children.
That said, over 50% of parents feel guilty about asking for that help, so David White, chief executive of TCM, says families need to “ditch the embarrassment” as parents are under increasing pressure to help children get started financially once they reach adult age otherwise their children risk “missing out”.
“Nationwide research suggests one out of every two first-time buyer mortgages taken up is supported by parents and to pay for the cost of university in 18 years time, parents need to put away £125 a month from the birth of that child,” says White.
“If the cost of education and deposit on a house is a £29,000 black hole now, it could be three times worse than that in 18 years time again. Parents interpret doing the best for their kids as paying for school trips and PS2s or short-term wants, but it doesn’t end there,” he continues.
In April, the Barclays Annual Graduate Survey found graduates are now leaving university with more than £13,000 worth of debt, while a 10% deposit on a house, according to the Halifax House Price Index in August 2005, would need to be around £16,000 – a total potential debt of £29,000 to young adults, before the cost of taking on a mortgage.
But, for many new parents, the ability to save so much money when a new child is born is out of their range until later in life, as statistics also suggest there are many additional costs when a new child is born, in part because one in seven families move house at that time, as well as potentially needing to look at life and additional protection cover as well as the purchase of new cars.
While most children’s savings tend to focus on the amount of pounds put away each month – they tend to be parent-oriented according to White – grandparents are more likely to want to pay a lump sum into a savings plan but have concerns or “trust issues” with handing the money directly to the parents.
In order to try and help intermediaries look more specifically at how grandparents and parents might save for the long-term future of their children, TCM has created a supplementary factfind “to help ask the right questions”, says White.
Through the Growing Up Bond plan – which is only distributed through IFAs – grandparents have the flexibility to do what they want with terms of access and the bond can be written in trust so funds could only become available on specific birth dates or as three annual lump sum payments to cover the cost of going to university.
White says there is further evidence presented by the Student Loan Company to suggest some grandparents choose to pay off the total sum of any loans the child might take out immediately after graduation.
“When children are born, it is not just the short or medium-term financial needs which change. Many parents forget in the long-term their children will still be dependent on parents for financial support. Graduation should be a milestone, not a millstone,” continues White.
Assets can be invested in any of 11 funds from UBS, Insight, Gartmore and Invesco Perpetual , and can be managed to provide ‘lifestyling’ as the bond also presents the signatory with an ‘annual progress review’ stipulating whether the investments are likely to meet their savings target.
Similarly, the policy could be written – perhaps as part of inheritance tax planning through a potential exempt transfer (PET) – to allow one of a couple to access some of the assets when the other dies, for example, as intermediaries might already be discussing IHT planning with clients.
A technical guide on trusts available has been produced for IFAs although the models have been designed with the support of Technical Connections to be as simple as possible to adopt, says TCM.
Minimum investment in the bond is £50 per month or £250 lump sum, however, charges vary from 3.5% initial charge to 5.25%, depending on the funds selected, along with an annual management charge of between 1-1.5%.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Julie Henderson on 020 7968 4571 or email [email protected].IFAonline
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