The Tesco ‘meal deal’ is one of the nation’s favourite lunchtime treats, and for £3.40, it’s easy to see why.
However, imagine being offered a trade: your usual sandwich, snack, and drink for not only university tuition fees but also a house deposit for your child or grandchild – many would gladly accept the trade.
Amazingly, you could also have a few quid left over for them to buy a new sofa and television!
So how does it work?
For simplicity, I’ve discounted inflation (or shrinkflation based on the way Yorkie bars are going) and reduced the expected investment return to account for inflation. So, instead of assuming, I’ve just used a flat net figure of 5.5%.
Instead of spending the £3.40 a day on your meal deal, you could invest £103.41 every month in a fund made of global shares (equities) such as the Equilibrium Global Equity fund. As previously mentioned, these funds typically target a return of 7-10% (the average annual return of the global stock market over the past 25 years is around 9%), so what would an inflation-adjusted return of 5.5% give for forsaking your lunch of choice?
Fast forward 18 years of contributing, and the investment would be worth £38,191, which any child or grandchild would be more than overjoyed with as an 18th birthday present. What’s more, they will most likely buy their first legal drink for you at the pub to celebrate!
What about university tuition fees?
After 18 years, you can stop making contributions to the General Investment account, and open a Lifetime ISA (LISA).
The main conditions of a LISA are that you must be between age 18-39 when established, £4,000 is the maximum annual contribution, and the proceeds must be used for a first home or retirement. It can be accessed at any time for any other reason but with a 25% penalty. (1)
Each year, your child or grandchild transfers £4,000 from their investment pot into a LISA, which the government generously tops up with an instant 25% bonus of £1,000 added to their investment.
After finishing university, your newly qualified child or grandchild is left with a hefty tuition fee bill of £28,000 to settle. This doesn’t have to be repaid immediately, but the debt will be subject to interest at RPI, and the recent extension to the repayment term of tuition fees (from 30 to 40 years) means the government expect 61% of students to fully repay their loan compared to 27% under the previous regime. (2)
Luckily, they have the General Investment account to fall back on, which will cover the bill in its entirety and leave the LISA valued at around £25,000. To be able to come out of university with no debts from tuition fees is a fantastic way to start working life, wouldn’t you agree?
Home is where the heart is
In the UK, the average deposit for a first-time buyer is a staggering £45,000 with the typical age of a purchaser being 34. (3)
Now, remember that £25,000 held in a Lifetime ISA?
Fast forward to age 34, and with no contributions since age 22, this is now worth just under £49,000! Again, having this readily available deposit would have a significant impact on getting on the property ladder and relieve one of the greatest financial burdens that young professionals have.
When it comes to helping your nearest and dearest along the pathway of life, our experience is that the earlier you can help them, the better. It is in the infancy of your child or grandchild’s journey when they need help the most. In too many instances our clients inherit money in their late 50s when their life is settled, and the emotional impact of a windfall has little to no impact.
Being able to see the benefit of your generosity is no doubt a heart-warming feeling and can eliminate potentially awkward conversations should your child or grandchild need financial help but may feel uncomfortable asking for it.
At Equilibrium, our financial planners take great pride in ensuring that not only are you well catered for but so is your family.
In the words of a famous supermarket, “every little helps”, and in this instance it really does.
We are here to help
If you would like to explore your intergenerational plan, please contact us on 0161 486 2250 or by reaching out to your usual Equilibrium contact.
If you are new to Equilibrium, please click here to contact us or call 0161 383 3335 for a free, no-obligation initial chat.
This blog is intended as an informative piece and should not be construed as advice.
Past performance is for illustrative purposes only and cannot be guaranteed to apply in the future. Investments will fall as well as rise.
Sources
(1) gov.uk
(2) confused.com
