Rise of the Bank of Gran and Grandad: should we be worried?

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One year old with grandparents

Research has revealed that nine out of ten grandparents have given cash and loans to their grandchildren in the past two years. And this isn't just a book token at Christmas: they are helping out with major purchases like cars and university fees. The changes to the pension rules mean that in the years to come, grandchildren could come to rely on them even more.

So should we be worried?

The research, from LV=, found that 86% of grandparents have given cash to their grandchildren recently. This wasn't just Christmas and birthday presents: 47% of grandparents give their grandchildren pocket money, and their gifts add up to an average of £30 a month.

One in eight grandparents helped with expensive purchases like cars and holidays, while one in 20 contributed to university fees. Meanwhile, many are helping to save for the future. Over the last five years, one in six grandparents have made contributions to child trust funds or savings accounts.

And this trend isn't going away. Some 52% of grandparents plan to give the next generation hand outs within the next five years, with an average amount of £1,000.

Why?

The researchers discovered that the overwhelming reason for this generosity as that the family were struggling with the rising cost of living, and that grandparents have stepped in. Almost three quarters (70%) say that they give their grandchildren money because they want to help out where they can, with one in six (16%) saying that they help out because the child's parents cannot afford to. One in 10 grandparents say that their grandchildren would struggle without the money they give them.

Others had always planned to leave their grandchildren something, and see it as better to give the money away when they can see their grandchildren enjoying it - especially as it means they may not have to pay inheritance tax on the money.

Is this a problem?

In many ways, this is a caring and generous response to the fact that many grandparents are significantly better off than their children. They bought property when it was far cheaper, and they are far more likely to have generous final salary pensions than future generations, so they can afford to help out.

However, there are a few alarm bells: three quarters of grandparents say that they have dipped into their savings to help their grandchildren this year. New pension rules could see the bank of Gran and Granddad helping out more. Under the new rules, which kick in next April, retirees will be allowed to take all of their pension savings as a lump sum and one in 16 grandparents are already considering taking out a significant amount of cash so that they can help out their grandchildren.

There's a risk they are giving more than they can afford. It's impossible to know what you might money for as you get older. If your health deteriorates you may need help around the home, or adapted living. You may need treatment that is not available on the NHS, or long-term care. And there's a risk that if you have given away your savings without considering these scenarios, you could see yourself short of cash when you most need it.

Richard Rowney, LV= Life and Pensions Managing Director, said it was great to see such generosity, but that: "The average retirement is now much longer than past generations and people's lifestyle and associated costs are likely to change over this period. It is important that those approaching retirement choose to structure their income in a way that offers them enough financial flexibility to enable them to remain generous, but also adapt to their changing needs."

There is an interesting alternative: lending money to grandchildren. Amongst all grandparents, one in 14 has lent money to an older grandchild for deposits for property and holidays, lending on average £500 per grandchild, with one in ten planning to do so in the future.

If, for example, you decided to help a grandchild get onto the property ladder, there's nothing stopping you establishing a repayment plan so the money is returned to you as a regular income. Alternatively, you could take part-ownership in that property as an investment - and either just take advantage when the property sells, or take rental income on the portion of the property you own.

But what do you think? Is generosity the best policy?