A helping hand for the next generation

A helping hand for the next generation

Contents Thwarted aspirations 4 Breaking free from debt servitude 6 Climbing on to the housing ladder 7 Transform their future 8 About us 10

Millennials have many things in their favour. Now in their twenties and early thirties, they are arguably the most educated generation in history and have grown up in a digital era full of new opportunities. They also face significant financial challenges. Of course, young people rarely had it easy in previous eras, but these are a different set of challenges to those faced by their parents or grandparents. Millennials are struggling with more university debt than any generation to date. At the same time, rising house prices and living costs have made it increasingly difficult for them to get on to the housing ladder. And while life is a struggle for millennials now, the future may not look much brighter. Beset by so many immediate financial concerns, such as paying off debt, meeting the rent or saving for an elusive deposit, the possibility of long-term saving with a pension or an ISA for a more comfortable future can seem even more remote. Fortunately, it does not have to be like this. There is a solution to the millennials financial woes and it lies in the family. Grandparents, by tapping into their own wealth, can give the younger generation the financial leg up that they so desperately need. Of course, leaving an inheritance at death to younger family members is nothing new. But gifting wealth now, while you are still alive, could be transformative for the younger generation and save on inheritance tax too. The wealth that many grandparents have accumulated can be used to help grandchildren on to the housing ladder and give them the headroom to build up their pension and other savings. Here at Brewin Dolphin, a leading wealth manager, we can work with you to develop tailor-made financial plans that enable the whole family to meet their financial goals. We will do the hard work, building a financial action plan to give you and your family the security you want in the future. The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

Thwarted aspirations Rocketing house prices and rising rental costs have made it increasingly difficult for young people to get on to the housing ladder. As millennials have been priced out of the market, the tide of home ownership has turned. In 1991, 67% of the 25 to 34 age group were homeowners. By 2014-15 this had declined to 37%. 1 The difficulty of buying a property has been made worse by the stricter lending criteria following the financial crisis. While mortgage rates have never been lower, the best deals are only on offer to those with large deposits. Saving for a home deposit would be hard enough if you were starting with a clean slate, but many millennials are saddled with university debt. While millennials want to save, they either can t due to high living costs or despairingly feel there is very little point. The struggles faced by the millennial generation are highlighted in stark detail in part three of the Brewin Dolphin Family Wealth Report. Brewin Dolphin commissioned the Centre for Economics and Business Research to look at trends in wealth, investing and spending among 25 to 34 year olds. Key findings include: Around 15% of 25 to 34 year olds felt that major life goals, such as home ownership, seem so unachievable that it discouraged them from saving. Some 37% of households where the main income earner is aged 25 to 34 have negative financial wealth their liabilities exceed the level of their assets. Almost a quarter (23%) saves nothing at all, and just under a fifth (18%) saves less than 5%. Three in five (61%) say they have no spare money to save. Millennials are spending 90% of their income and a fifth (21%) admit to stretching themselves financially to keep up with their peers. Taking action Given their lack of saving, and without a home of their own, the future for a millennial may appear bleak. Their situation contrasts sharply with their grandparents generation who hold a substantial proportion of the country s wealth and are enjoying faster income growth. As a grandparent, you can turn your more fortunate situation to the millennials advantage. A gift from you can transform your grandchildren s lives, giving them the financial leg up that many of them so desperately need. It can help to fill the affordability gap, enabling your grandchildren to get on to the housing ladder and to engage in longer term saving. Many grandparents do not fully realise what a dramatically positive effect they can have on the financial future of their grandchildren by taking action now. 1 Office for National Statistics: The English Housing Survey, Table FA1231 18 February 2016. The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. 4 Brewin Dolphin A helping hand for the next generation

Millennials are between a rock and a hard place. While they aspire for homeownership, it is becoming an increasingly unreachable prospect as house prices have soared. Liz Alley, Divisional Director for Financial Planning A helping hand for the next generation Brewin Dolphin 5

Breaking free from debt servitude Many millennials start their working life with a debt problem, putting a serious strain on their finances. This is a consequence of the large numbers attending university who are forced to take out loans to pay tuition fees. Student loan debt rose to 86 billion last year. Graduates who paid fees of up to 9,000 a year are estimated to have left university with an average of 44,000 of debt 2. Student loans are not loans in the conventional sense, as repayments are linked to how much the graduate subsequently earns. Unlike a mortgage or bank loan if it isn t repaid after 30 years it will be written off. However, during those 30 years being heavily in debt can severely narrow your opportunities. It makes getting on to the property ladder harder, making it more difficult to save for a deposit and get a good-value mortgage. By reducing monthly take-home pay it hampers the ability to save for the future. How you can mitigate the debt burden If you would like to mitigate the debt burden for your grandchildren, we can work with you to establish a university finance plan. By getting involved you can help your loved one avoid a near 50,000 debt millstone that could otherwise linger until their early fifties. You may have already considered supporting your family financially by leaving an inheritance at death. By that time it may be too late to help your grandchildren and make a real difference. Lifetime gifts can be a more effective way to assist your grandchildren when they are most in need. You also get to enjoy seeing the ways your offspring benefit from your generosity. 2 Financial Times: Two-thirds of UK students will never pay off debt, 4 July 2016. With our help you could transform your grandchild s life without compromising your own retirement plans. Our financial experts will establish the most effective way to help mitigate their debt burden. Timing is crucial. If your grandchildren are about to start university your options may be limited to paying as much of their tuition and maintenance fees as possible in yearly lump sums. Given the cost of university, that can be quite a burdensome task. Planning ahead and setting up a savings plan when your grandchildren are young can make covering university costs much less onerous. By investing a fixed amount at regular intervals your investment will benefit from pound cost averaging. This means more shares are purchased when share prices are lower and fewer shares are purchased when prices are higher; to some extent, this should smooth out the highs and lows of stock market investment. The investment returns will also be boosted by compounding the return. For example, if you saved 300 per month into a stocks and shares Junior ISA from your grandchild s fifth birthday it could be worth 53,397 by their 18th birthday, assuming an annual growth rate of 2%. At a 4% annual growth rate, it would be worth 61,252, helping to cover tuition fees. Please note that both these amounts are net of charges. Your gift can turbo charge your grandchildren s start in life. The benefits will last a lifetime. Many grandparents are unaware that a solution is at their fingertips. This could change their grandchildren s lives, both now and in the future. Liz Alley, Divisional Director for Financial Planning The value of investments can fall and you may get back less than you invested. This information is for illustrative purposes only and is not intended as investment advice. The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. 6 Brewin Dolphin A helping hand for the next generation

Climbing on to the housing ladder For many millennials the hope of owning a home - a hope that previous generations took for granted can seem like an impossible dream. Nearly a third of 18-34 year olds are living with their parents. 3 Even highly-paid professionals in their 20s and 30s are finding themselves trapped in rental limbo. The affordability challenge Generation Rent have found themselves locked out of the market as property prices have soared and salaries have failed to keep up. House prices have doubled since 2002, while incomes have increased by just 27%, according to a recent report from accountancy firm PwC 4. This has created an affordability challenge that has been exacerbated by the size of the deposit required to buy a first home. The average deposit paid for a first-time property today is around 37,000, says PwC. It now takes renters three times longer to save for a deposit than it did at the turn of the millennium, and six times longer than in 1990 4. Help from the Grandbank The good news is that home ownership need not be out of reach. Grandparents can help to fill the affordability gap. Gifting a deposit to a grandchild during your lifetime can assist your loved ones when they have most need of your financial help. This can be transformative, taking your grandchildren out of the rental trap and onto the property ladder. It requires careful planning. You do not want to hand over money only to regret it later in life when your own finances run short. However, we at Brewin Dolphin can work with you to establish how much wealth you have available to give to younger relatives. We can carry out a cashflow analysis that will help to establish what you might need in later life, what is available now in terms of capital and income and how you might need to invest in order to maintain your lifestyle in the future. We can consider all the options available to you from releasing assets from an ISA, making lifetime gifts out of income or downsizing to free up housing wealth. Our experts will build a bespoke financial plan that gives you clarity about your current and future situation and gives you the confidence to help your family now. 3 Financial Times: US millennials caught in the parent trap, 1 February 2016. 4 PwC: How long will it take Generation Rent to get on the housing ladder? 10 August 2016. Average number of years of saving required for deposit on first home (by first year of saving) Years to save 20 18 16 14 12 10 8 6 4 2 0 1988 Golden years Soaring house prices Credit crunched Renting for a generation? 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Source: PwC analysis based on ONS data (assuming no family assistance in saving for a deposit) The value of investments can fall and you may get back less than you invested. This information is for illustrative purposes only and is not intended as investment advice. A helping hand for the next generation Brewin Dolphin 7

Transform their future Providing your grandchildren with the financial support needed to buy a property has immediate benefits: the stability that comes from having a home of their own. However, it can also open up opportunities that have a profound and long-lasting positive effect. By removing the need for your grandchildren to keep saving for a deposit supporting them in a house purchase can free up income. Mortgage payments are also typically cheaper than the rent they would otherwise by paying. The income saved can enable them to start saving for other reasons, such as retirement, through pensions or ISAs. With your help they could have not only a home but a six-figure pension pot by retirement. Making your gift count How much you gift to your grandchildren will depend on both your and their individual circumstances. However, the bigger the gift the bigger the impact. If they have a larger deposit your grandchildren will have access to more attractive mortgage rates. Borrowing less will also make their mortgage repayments more affordable. That can free up more income that can be usefully deployed elsewhere. Our case studies show the substantial difference that increasing the size of your gift can make. The tax advantage Another benefit to gifting wealth while you are still alive is that it can save inheritance tax. Each tax year you can give away 3,000 and that gift will not be subject to IHT when you die. If a gift is regular, comes out of your income and does not affect your standard of living, any amount of money can be given away and ignored for IHT. It is possible to make further tax-free gifts known as potentially exempt transfers but you have to survive for seven years after making the gift for your estate to get the full benefit. You can give away most assets, including cash, shares and property, but it must be an outright gift from which you can no longer benefit 5. Moving forward Talk to your family about their financial aims and concerns. Take stock of what you have, what you owe and what is coming. Once your own financial situation is clear, consider what you could gift to your grandchildren now. If they are still young, consider setting up a savings plan to cover costs in the future like university tuition fees. Even if your grandchildren already have money put aside for a property, consider helping them to boost their deposit: mortgage lenders offer more attractive rates to those with larger deposits. Suggest your grandchildren consider the best way to invest any money saved. Monthly gifting of smaller amounts out of income This table shows what the end result could be if you put away spare income into your grandchild s ISA or pension assuming a 2% and 4% growth rate net of charges: 100/month 300/month ISA 2% growth for 20 years 29,480 88,439 ISA 4% growth for 20 years 36,677 110,032 Pension 2% at age 65 78,990 236,971 Pension 4% at age 65 120,398 361,193 Capital is at risk. Your investments could be worth less than you invested. Figures in the table above assume pension contributions are made over 36 years from age 29 to 65. As you can see, regular gifting that s invested could make a big difference to your grandchild. 5 The Money Advice Service: Gifts and exemptions from Inheritance Tax. 8 Brewin Dolphin A helping hand for the next generation

Case study Give your grandchildren a leg up Kelly is 29 and lives in a flat which she rents for 725 a month. She has her heart set on buying a two-bedroom semi-detached house for 184,973 - the average UK price paid by a first-time buyer. However, her high living costs mean that she cannot manage to save for a deposit or for the future. At 725 per month she can expect to spend 217,500 on rent over the next 25 years, assuming no rental growth, and will have nothing to show for it at the end. Fortunately Kelly s grandmother Margaret, aged 72, is keen to help her out by gifting her money for a deposit. If Margaret survives for seven years the gift will be outside of her estate and not be subject to inheritance tax. 5% deposit Margaret considers gifting Kelly an amount equal to a 5% deposit and costs associated with the house purchase 13,193. This would allow Kelly to borrow 175,724 (95% of the value) with monthly mortgage repayments of 1,005. As a first-time buyer and based on her 45,000 salary, rates on a 95% loan-to-value mortgage are around 4.78% APR over a 25-year term. The total costs would be 301,500 over this period assuming the mortgage rate did not change. 25% deposit After seeking financial advice Margaret realises that she has the capacity to provide Kelly with a bigger deposit. She gifts Kelly an amount equal to a 25% deposit plus the house purchase costs ( 50,188). Because Kelly has a bigger deposit she qualifies for a much better mortgage rate of 1.8% APR. This reduces Kelly s mortgage repayments to 574 per month. Outgoings 725/month Rent 725/month Wealth 0 Source: Brewin Dolphin ( 50k deposit from family) 185k home 1 Potential wealth 2 366k 181k pension 2 1 Source: ONS UK average first time buyer purchase price. No assumed house price growth. Mortgage free after 25 years. 2 Investments put capital at risk and you may get back less than you invested. The pension assumes monthly saving with 4% annual growth rate re-invested net of charges at aged 65. This is meant as a guide only and does not constitute financial advice. Please seek financial advice. www.brewin.co.uk. + Mortgage 574/month Pension 151/month Over the 25 years of her mortgage this would reduce her capital and interest payments to a total of 172,200. This is 129,300 less than if she had purchased the property with a 5% deposit. It is 45,300 less than she would have paid over 25 years in rent. Future dividends The difference between the 725 a month rent that Kelly has been paying and the 574 a month mortgage is 151. Putting this 151 into an ISA (in case she needs to withdraw the money later) earning a return of 4% (net of charges) a year, could build up into a savings pot worth 77,633 after 25 years. If instead Kelly decided to put the 151 a month into a pension plan, she could build up 181,800 of retirement savings after 36 years, including income tax relief of 20% and based on 4% investment growth (net of charges). This information is for illustrative purposes only and is not intended as investment advice. The value of investments can fall and you may get back less than you invested. A helping hand for the next generation Brewin Dolphin 9

About us Brewin Dolphin is an independently-owned and award-winning wealth manager, specialising in creating bespoke financial plans and investment portfolios for individuals, charities and pension funds. We were founded in 1762 on the belief that the successful management of wealth takes an understanding of money but is rooted in an even deeper understanding of people. Placing a premium on personal relationships, we have built up a network of 28 offices across the UK, Channel Islands and Ireland. As one of the largest independently-owned wealth management companies not tied to any banks or fund managers, we have made a very deliberate choice to have no in-house funds or products. This gives our advisers full independence in how they craft personal advice and investment strategies for clients. We also offer the Brewin Portfolio Service to clients who are comfortable picking a portfolio made up of several funds without the need for financial advice. This is available for investments of between 10,000 and 200,000. To speak to one of our financial planners, call 020 3201 3900 or contact your local Brewin Dolphin office and we will be delighted to help you. The value of investments can fall and you may get back less than you invested. Whilst Brewin Dolphin looks across a wide range of financial products and services in order to meet your needs and objectives, we will not review all Retail Investment Products in the market. As such we offer a Restricted Advice Service. Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on individual circumstances; therefore the information in this booklet should not be relied upon without seeking professional advice from a qualified tax adviser. 10 Brewin Dolphin A helping hand for the next generation

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