Pitting the old against our youngsters
MUCH has been made of intergenerational fairness – or the lack of it – of late, with the older generations seen as the pension and property-rich haves while youngsters are painted as the wealth-starved havenots.
While many balk at the idea of pitting old against young in such a way, three studies released last week highlight just how acute the problem facing the younger generation is.
One, from mutual society Scottish Friendly, found that while fewer than four per cent of those aged 65 and over spend more than their income on essential costs such as housing, electricity and water, in the 18 to 24 age group one in four do. For those aged between 25 and 34, 17 per cent are living beyond their means while in the 35 to 44-year-old age group the proportion is 15 per cent.
Another study, which was carried out by YouGov on behalf of Clydesdale and Yorkshire Banks, found that without help to put together a deposit youngsters will have to save for an average of 59 years before being able to get on the housing ladder, with the period rising to 193 years in the UK’s most expensive borough, Kensington and Chelsea.
This was backed up by research from wealth manager Brewin Dolphin, which found that younger generations are increasingly being shut out of the housing market, with the proportion of 25 to 34-year-olds who own their own homes falling from 67 per cent in 1991 to 37 per cent in 2015.
Not only that, but almost one-quarter of Scottish millennials (23 per cent) are not even managing to save anything from their monthly pay- packet, while 12 per cent feel that home ownership, once seen as the best way of creating and sustaining wealth, is so beyond their reach that they have given up trying to save for one altogether.
“Millennials are between a rock and a hard place,” said Liz Alley, divisional director of financial planning at Brewin Dolphin.
“While they aspire for home ownership, it is becoming an increasingly unreachable prospect as house prices have soared. While they want to save, they either can’t due to high living costs or despairingly feel there’s very little point.”
This is particularly so in the current climate, with rising inflation putting an added squeeze on already tight budgets.
According to Scottish Friendly’s Disposable Income Index, 70 per cent of UK households are concerned about the impact inflation will have on their disposable income in the next 12 months, with just under half (46 per cent) planning to cut back on their spending. The majority of those said they need to do so to cope with the increased cost of daily living.
Scottish Friendly savings expert Calum Bennie said that with many households “expecting a bumpy ride thanks to the twin headwinds of Article 50 uncertainty and rising inflation”, many are “currently holding their breath and tightening their belts”.
Against this backdrop, with home ownership and the wealth it is assumed to create getting further and further from the younger generation’s reach, Brewin Dolphin has come up with a solution that it reckons will not only get the millennials out of their current bind but will help them save for their futures, too.
If grandparents were to gift their grandchildren a 25 per cent deposit plus costs, Brewin Dolphin said, they would not only be able to cut their monthly outgoings, but what they were saving on rent they would be able to save into a pension.
In a worked example, Brewin Dolphin said that a person paying £725 a month in rent would, over 25 years, have handed over £217,500 to a landlord without being able to save a penny for themselves.
If, however, that person was to buy a home for the average UK price of £184,973, helped with a £50,000 deposit gifted from their grandparents, their mortgage costs would be around £525 a month, allowing them to save £2,400 a year into a pension or other savings vehicle.
“We are urging Scottish millennials to ask ‘Grandbank’ – the bank of their grandparents – for a deposit for a home, Alley said.
“This would get millennials out of the rental trap and onto the property ladder and, with any rental savings then ploughed into a pension, they could also have a six-figure pension pot.
“Most over-55s intend to support their family financially, via their will. However, releasing the same money now could change millennials’ lives, both now and in the future.”
Aside from the fact that the calculations take no account of rising rents or interest rates, the problem with the plan is that most grandparents, who are facing the same inflationary pressures as their progeny, will have more than one grandchild to help out.
With increased life expectancy also meaning the older generation is having to fund ever-longer retirements, the question is, will many really be able to help in this way?