Teenagers have never exactly been short of things to complain about to their parents. You didn’t give them enough support, sent them to the wrong schools, stopped them going to the right parties, or didn’t get them the latest iPhone. But Generation Rent, perhaps stirred up by too much time spent reading Ed Miliband’s Twitter feed, are likely to be especially aggrieved. To add to the traditional litany of charges from the younger generation against the older can be added one that might even have a kernel of truth in it — you stole our future.
There is a case to be made that the big divide in British society, as indeed in most developed economies, is not between classes, races, religions or regions, but between generations. The Baby Boomers benefited from rising real incomes, economic growth, soaring property prices, a bull market in stocks, free university education and, perhaps most helpful of all, generous final salary pension schemes.
The newly retired sixtysomethings are living in hugely valuable houses on which the mortgage has long since been paid off, with secure pensions, and can spend their time booking holidays on the easyJet website, while their children and grandchildren face a far less secure future. They are weighed down by student debts, property prices have spiralled so high they can hardly hope to make their first step on the property ladder, they have to intern for years before they can land their first paid job and, at the end of it all, the chances are they won’t even have a pension to look forward to.
But, heck, what can you as a parent do about it? The national debt is not going to be repaid overnight, and certainly not out of your savings. Four-storey villas in Notting Hill are not suddenly going to be given away to any 27-year-old who can scrape together a mortgage. No government is going to abolish university tuition fees, or restore generous grants — they couldn’t afford it even if they wanted to.
So is there any way you can secure your children’s or your grandchildren’s future in a world that is likely to be a lot tougher than the one the Baby Boomers grew up in? In fact, there are plenty of places you can start, and the sums involved aren’t all too daunting.
Education is probably not the answer. Even though politicians love to make speeches about how they are investing for the knowledge-based, high-skilled economy of the future, all the evidence suggests that the returns to higher education are falling not rising. According to research by the economists Paul Beaudry and David Green, in 1970 only one in 100 taxi drivers in the US had a degree. Now it is 15 in every 100, even though the invention of satnav means that driving a cab is probably a lower-skilled job than it used to be. One in four bartenders now has a degree. The difference between what graduates and non-graduates earn has been shrinking steadily in real terms since 2007. There are various explanations for that. The vast expansion of higher education means there are a lot more graduates on the market — and you don’t need to know much economics to know that when the supply goes up, the price goes down. The globalisation of the economy means that white-collar jobs are now seeing the same levels of competition as blue-collar ones. Whatever the reason, the upshot is that apart from a few specialisms such as learning Mandarin, investing in a child’s education is not likely to secure them much of a financial future.
Property is a better option. Nobody ever wound up broke because they owned too many houses. Indeed, it is the vast inflation in house prices that has concentrated wealth in the older generations and made life tougher for the younger ones. Since the Halifax started tracking house prices in 1983, the average price of a home has risen by 428 per cent and in London they are up by 559 per cent. Of course, that is not so much when adjusted for inflation — national prices are only up by 101 per cent on that measure, and London prices by 124 per cent. But it is still a lot. If you can scrape together the deposit for a buy-to-let property, invest it in a flat to rent out, and let house price inflation work its magic, you should be able to create a valuable asset for your child.
There are some downsides, however. Houses may well prove to be historically overvalued. If the UK’s population does not keep expanding the way it has been, and if the government finally decides to release more land for development, then in real terms property may not go up in value in the next 40 years in the same way it did in the last. Also, a minor cannot own property in their own name. So if you want to buy a flat for your child, you will need to set up some form of trust to own it, and that is going to involve expensive legal fees. On top of that, a property requires maintenance, and that is going to eat up your time, which is probably not what you want.
In reality, the best way of securing your child’s future is going to be a tax-efficient investment in the stock market. We are now into the 14th year of what is turning into an epic bear market — the FTSE100 has still not managed to claw its way back to the levels it reached all the way back in 1999, and is down substantially in real terms. But that should not obscure the fact that over the long term, equities usually outperform all other assets, especially if the dividends they pay are re-invested. From 1963 to 2012, for example, British equities returned an annualised return of 6 per cent, according to research by Credit Suisse. If you run the figures back to 1900, so that it takes in a couple of wars, some revolutions, and a global depression, the annualised return is still an impressive 5.2 per cent.
Over time, those kind of returns start to add up. The point is to start early. Compound returns can be very powerful if they are allowed to work over decades. A child can’t start investing in infancy for the obvious reason that they don’t have any money. But you can invest for them. Research by Fidelity found that if you invest £3,600 at your child’s birth, it should grow to £127,000 over 65 years, assuming a 5.5 per cent annual return, which is roughly in line with the averages for the past century. Make that investment every year from birth to the age of five, and it should well turn into a sizable pension fund – and all without any contributions from the child themselves. Even better, junior ISAs and Junior self-invested pension schemes mean that the money will accumulate largely free of tax.
It will cost some money, of course. But hardly a terrifying amount. And at least your children won’t be able to accuse you of having robbed their future — and you will know that while most of Generation Rent will be wondering how to make ends meet as the 21st century draws to a close, your children will be leafing through cruise brochures.