U.K.: How to beat the mid-life money crisis

Couples are being squeezed by the financial demands of their children – and their parents Ali Hussain LONDON (The Sunday Times), March 2, 2008: MILLIONS of middle-aged, middle-class couples are battling to cope with their finances because of competing demands from their children and their own parents. Many couples in their forties and fifties are having to fund their parents’ retirement or care, while scrabbling to pay their children’s school and university fees. They have been dubbed the “sandwich generation” because they are squeezed between two layers of a sandwich – their children and their parents. About one in four people surveyed by Norwich Union, Britain’s biggest insurer, said they were preparing to cash in savings and investments to pay for their parents’ retirement. More and more grown-up children are also “sapping” their parents’ savings and investments to get on to the housing ladder, pay university fees or even get out of debt, according to another insurer, Scottish Widows. The average parent is handing over about £12,000 or £67 billion in total, Scottish Widows said. For those who send their children to private school, the bill is going to be much higher. Cate Knight, 50, from Effing-ham, Surrey, is one of those being squeezed. She recently paid more than £30,000 to help her elderly mother and inlaws move house. She also has three children at private school. Knight, an account supervisor, said: “I never thought I’d have to pay out so much at this stage in my life. It seems a never-ending process and I expect I’ll be paying even more when my kids start looking for property.” Fortunately for Knight, and the millions in similar situations, there are ways to cut costs and put mid-life finances in order. Give up a slice of your inheritance One way to obtain a lump sum is releasing equity held in your parents’ property. It means you won’t inherit the whole house when your parents die since a portion of its value will go to the equity-release company. If you are prepared for the consequences, though, it can be a way to raise a lot of money relatively quickly. An equity-release mortgage lets you use the money locked in a property without having to pay a monthly-repayment fee. There are two main types. With a home-reversion plan, you sell part of the property in exchange for a one-off lump sum or a regular income. With this type of scheme the heirs will know exactly how much they will get. The alternative, a lifetime mortgage or roll-up scheme, can be taken out on part of the value of a home, usually in return for a lump sum. Interest is “rolled up” and the loan repaid only at death or when the house is sold. The amount owed can grow quickly and swallow up an inheritance. However, most equity-release schemes come with a negative-equity guarantee to ensure the debt cannot be worth more than the value of the property. Offset your savings to pay school fees With school fees having risen 41% in the past five years, it is becoming harder to fund fees out of everyday income. The average annual cost of sending a child to a private day school is £6,655, according to the Independent Schools Council, but it can be as high as £20,000. The cost of boarding is an average of £6,712 a term – £20,136 a year. Parents whose children have just started at private school at the age of five can expect to spend £200,000 in fees over the next 14 years, according to AWD Chase de Vere, an adviser. This assumes fees rise by 5.9% a year. Even those who send their children to private school only for their secondary education will fork out an average of £136,000. Advisers recommend you start saving for your child’s education soon after birth. If you have left it too late you may consider an offset mortgage, offsetting your savings against your borrowings. With a £100,000 loan and savings of £30,000, you would only be charged interest on £70,000. Your mortgage would clear more quickly because your repayments would be based on the full £100,000, so you would, in effect, overpay each month. The “reserve” you build up – the £30,000 plus your overpayments – can be accessed at any time to cover school fees or university costs. If you are planning to send your child to private school, you can make overpayments now, then cut your payments once you start paying fees. Think carefully about discount schemes Some schools offer discounts if you pay fees upfront, often for at least three years. These are calculated on future fee rises, but you could still be asked to stump up more cash in future. Suppose a boarding school charged fees of £20,136 this year and offered a 4.5% discount for paying three years in advance. Assuming it expected fees to rise by 5.9% a year, you would pay £61,160 rather than £64,000. Consider grants and scholarships You don’t need to be from a low-income family to benefit from help with university costs. Many bursaries available are for academic excellence and tend to be in the less-popular subjects such as science and engineering. Southampton University, for example, has 15 grants of £2,000 a year available for studying biological sciences. Only those who get top grades in their A-levels are eligible, and the pay-outs in the second and third years depend on the students getting 60% or more in their first and second-year modules. Many universities also offer financial assistance for sport and music. Brighton University has an “elite athletes” scheme, which offers scholarships of up to £1,000 a year and free access to the university’s sports facilities to students who have competed nationally at either junior or senior level. Ease the burden of long-term care If your parents need care, the burden can be crippling. The average cost is just over £28,000 a year – £112,312 over the four years’ typical stay in a home for an elderly person, Saga says. Anyone who has more than £21,500 of capital will have to pay most of the cost themselves. A care-fee annuity, also called an immediate-needs annuity, can be bought at the point when care is needed. In exchange for a lump sum, it meets all or some of the care needs. It is paid directly, tax-free, to the care home. To qualify, the person needing care must be unable to perform one everyday activity. The average cost of a long-term care annuity is usually three times the annual benefit. So you will need roughly £30,000 to secure £10,000 of annual income, although it depends on the age and health of the person needing care. You can take out an annuity where payments are fixed or one that increases by 5% a year to cover inflation. The downside is that the investment is usually lost if death comes soon after the annuity is set up. Unlock money from your pension You can now release some money from your pension while continuing to work. However, you have to be over 50 – rising to 55 from 2010 – to benefit. You are allowed to withdraw up to 25% of your pension as a tax-free lump sum. If you are in a company scheme, you should be able to release the cash and carry on working. If you have a personal pension, the remainder must be invested in a drawdown plan where it stays in the stock market. Before 2006, you had to start drawing an income from this as soon as you had released the tax-free money, but that is no longer the case. And you do not have to draw it down in one go. Say you had a pension fund worth £400,000; your tax-free lump-sum entitlement would be £100,000. If you needed an extra £10,000 a year, you could withdraw £40,000 from your fund, take £10,000 (25%) as a lump sum and invest the remainder in a drawdown plan. You could repeat this in later years. Cut down on car costs The cost of car insurance has shot up over the past year and drivers aged between 40 and 50 have been hardest hit. Premiums are up 7% on average for middle-aged motorists, according to independent analyst Consumer Intelligence which carried out research on behalf of Sainsbury’s. Cohabiting couples can save more than £100 on average by making a partner an additional driver on their policies, according to Tescocompare.com. MOTHER’S THE LIVE-IN HELPER FINANCE directors Greg and Deborah Broadbent, aged 41 and 45, have to find enough money to pay for their children’s education while looking after Greg’s mother, Margaret. The couple, who live in Tooting, south London, are paying £20,000 a year to fund the education of Eliza, eight, and Zara, six. Greg said: ‘Up until last year my mother lived three hours’ drive from our home. She had a full-time job but was not earning enough money to make ends meet. As a result she got into debt.’ The Broadbents were unable to support Margaret when she had her own house so persuaded her to sell up and live with them in London. Margaret has replaced their live-in nanny’s role, providing them with a significant saving. The couple are also placing money into investment Isas and other savings accounts to help with the costs when their children go to university. © Copyright 2008 Times Newspapers Ltd.