A recent LV= report found that half of parents and grandparents have helped grown-up children during the pandemic, at an average cost of £1,300.
Supporting a struggling child worried about their education, job security, or mental health is important. With a good plan in place, you should be able to provide the financial help your child needs, while staying on track to realise your long-term goals.
Here are some questions you’ll need to ask yourself:
1. Where will the money come from?
You might have to decide between several different ways of helping your child out of financial difficulty. Each option will have its consequences for you, either now or in the future.
Your long-term financial plan will no doubt include an emergency fund to tide you over should the unexpected happen.
We would normally recommend holding a fund of between three- and six-months’ worth of living expenses and this could be sufficient to help your child in the short term. You might have other savings, held in an ISA for example, or receive regular income from buy-to-let properties, that you could gift to your child.
You can gift money using HMRC’s Inheritance Tax (IHT) annual exemption, which allows you to give up to £3,000 without that amount being added to the value of your estate.
This amount is per individual and you can carry any unused allowance forward. If neither you nor your partner used your exemption last year, you could gift £12,000 to your child tax-free.
If you exceed the £3,000 limit, the amount may become liable for IHT. Tax is payable at 40% if you die within three years, and then on a sliding scale to zero if you survive seven years from the date of making the gift.
You might have money tied up in a pension. If you are over the current minimum retirement age of 55 (rising to 57 in 2028) you might access some of your funds earlier than planned. Remember that there are long-term consequences to this.
The earlier you start accessing pension funds the longer you will need to budget with the rest.
Accessing taxable defined contribution (DC) funds using certain “flexible” options could trigger the Money Purchase Annual Allowance (MPAA). This limits the amount you can contribute while still receiving tax relief, reducing the potential size of your pot.
The Annual Allowance stands at £40,000 (or 100% of your pensionable earnings if lower). The MPAA lowers this amount to £4,000, severely reducing your ability to grow your retirement fund.
If you want to help a child financially while continuing to contribute to a pension, be sure to check whether your plans will trigger the MPAA. If so, you may need to look elsewhere.
2. Can you afford it?
You’ll need to ask yourself some important questions before you supply financial help to your child.
Is it a gift or a loan?
It is important to have this discussion early on. If it’s a gift and you can stay within HMRC limits, the gift will be tax-free. If the gift is larger, you might consider making two smaller gifts on either side of the tax-year.
If you are offering a loan, make sure that both parties are aware of the expectations for paying back the money. How much is the loan for? When will repayments start and how much will they be?
Knowing the answers to these questions will help you work out if you can afford to gift or loan money, and help you budget effectively.
Will your standard of living be affected?
In February 2020, Mortgage Introducer reported on the Bank of Mum of Dad helping adult children onto the property ladder. A study found that 40% of parents who gifted money to their children saw a detrimental impact on their standard of living.
Being able to afford to help your children isn’t only about having the available funds. You should also be able to part with them while remaining on course to achieve your own long-term goals.
We can help with this so speak to us before you make any offers of financial assistance.
3. Do I need to seek advice?
A long-term plan puts you in control of your finances and gives you confidence in your future. Priorities and plans can change which is why we recommend regular reviews to ensure you are still on track.
Whether you are already helping a grown-up child struggling through the pandemic – or are considering it – speak to us now.
We can take a holistic view of your finances, helping to decide where the money will come from and giving you peace of mind that your child will be looked after while ensuring that your goals remain attainable.
Get in touch
Please contact us if you’d like to discuss any aspect of your current retirement plans, lending money to a child, or to book in your regular review.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of, and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.