Half of young people are putting plans on hold due to the high cost of living.
Here are 5 ways you could help your kids.
A new piece of research from Moneyhub has revealed that the younger generations are putting important life experiences on hold due to the rising cost of living.
The study showed that a total of 31% of participants had put off life goals due to the high cost of living. What’s more, this percentage jumped to 48% for those aged between 18 and 34.
If you have children in this age bracket, they might be postponing their own goals for similar reasons.
These life goals could include:
- Buying their first home. Statista reports that as of 2023, the average price of a first home was £288,000, up from £212,473 five years earlier.
- Getting married. A survey from Hitched reveals that the average couple spent more than £20,000 on a wedding in 2023, up from £17,300 in 2021.
- Having children. Data from the Child Poverty Action Group Child Poverty Action Group shows that as of 2023, it cost £166,000 for a couple to raise a child until the age of 18, and £220,000 for a single parent (this does not include private school fees).
- Ticking travel destinations off their bucket list. According to Go Compare, 30% of millennials will spend less on a holiday in 2024 than they did in 2023, and 37% are shortening or cancelling their travel plans altogether.
So: what can the Bank of Family do to help?
If you wish to provide financial support to your children that is affordable, used for genuinely life-improving means, and viable over the long term, it’s important to consider several routes before you proceed.
Keep reading to learn five ways you could help your children financially if they’re putting off important life events due to the high cost of living.
- Give an annual tax-efficient financial gift
If you wish to provide a boost to your child’s annual income and prevent them from missing out on life’s important opportunities, you could transfer a lump sum to them once a year. Under HMRC rules, this counts as a “financial gift”.
Notably, as of the 2024/25 tax year, there is a £3,000 “annual exemption” to be aware of. The annual exemption represents how much you can offer as a gift tax-efficiently.
If you give more than £3,000, split among however many recipients you like, the excess amount could count towards your estate for Inheritance Tax (IHT) purposes if you pass away fewer than seven years afterwards.
We’ve previously broken down the ins and outs of this “taper relief” rule, and the exceptions to it, in a previous article – if you wish to learn more, it might help to revisit it.
For now, know that you can transfer up to £3,000 a year to your child or children tax-efficiently.
This boost to your child’s income could help them afford holidays, childcare, and school fees, or be put towards a larger expense like a wedding or property purchase.
- Offer regular funds directly from your income
If you’d prefer to make regular payments to your child as an income top-up, this could be a tax-efficient and helpful solution.
This is a strategy known as “gifting from income”, meaning making payments to your child taken from your income, not your investments or savings.
In this context, “income” includes money from:
- Pensions, including the State Pension
- Capital gains
- Dividends
- A salary
- Interest
- Rental properties
- Business holdings.
Unlike using your annual exemption, gifts from income are usually tax-free, and can’t be counted as part of your estate for IHT purposes later.
But it’s important to know that you cannot make sacrifices to your own quality of life in order to make these payments – essentially, it needs to be “spare money” that you choose to give to your children.
Your children can usually receive the money tax-efficiently, unless the gift generates interest, pays dividends, or earns capital gains.
To learn all about this way of supporting family members, read the detailed explainer about gifting from income on our news page.
- Fund specific projects or events yourself
If your child is saving up for a wedding or trip abroad, or is struggling to meet important expenses like childcare or school fees, you could opt to pay for these expenses outright.
For example, if you have a grandchild in nursery school, you could pay the fees directly rather than giving your grownup child the money to pay for it.
This strategy becomes complicated when it comes to buying property as a gift or investing on another person’s behalf. But for basic expenses that require a simple transfer of funds, there is usually nothing to stop you from paying for these elements yourself. Remember, though, that there could be IHT implications for grandparents who pay for education costs or weddings directly – these count towards your annual exemption, unless they are taken from income.
It may help to discuss the amount you’re willing to pay, and over what time period, before you sign up to fund a specific project.
Covering some costs on behalf of your child might enable them to:
- Focus on other essential expenses
- Build up their emergency fund
- Invest more each year
- Pursue important opportunities they had previously put off.
In these instances, family financial planning could be of great value. By involving your adult children in your financial planning journey, you can both experience the potential benefits to your wealth and advance towards your long-term goals.
- Set up a trust
If you wish to have more control over how your children use the financial support you offer, or you want to give the money over a specific time frame, you could consider setting up a trust.
There are five main types of trust:
- Bare trust
- Discretionary trust
- Accumulation trust
- Interest in possession trust
- Mixed trust
While each of these has its own set of rules and regulations, generally, trusts allow you to give money to loved ones while maintaining control over:
- When they receive the money
- How much they receive
- What the money is used for.
For example, if you had a grandchild due to arrive in the next six months, you could set up a discretionary trust to help support your child with costs. This trust may let you determine:
- The amount your child will receive after their baby is born
- How often this amount will be paid and over how many years
- How your child should use the funds (such as to pay for childcare or school fees).
What’s more, trusts are also considered a tax-efficient way to pass funds to the next generation. You can read our full insights around paying tax on trusts on our news page.
- Pay into their pension
Finally, if your children are worried about not saving enough for the future, you could offer to make a tax-efficient contribution to their pension.
Indeed, Royal London reports that 49% of workers aged between 18 and 34 investigated cutting or completely stopping their pension contributions between September 2021 and September 2023. This is largely due to the rising cost of living prompting young people to need more for immediate spending, leaving them less for long-term planning.
However, by stopping pension contributions of 5% with a matched employer contribution for one year, a person earning £35,000 a year could miss out on £10,575 potential pension growth over 20 years.
So, if you wish to assist your children in saving for the future while allowing them to still pursue important life goals in the here and now, paying into their pension could be a great option.
You could do this by:
- Making contributions into their defined contribution (DC) workplace pension
- Encouraging them to set up a self-invested personal pension (SIPP), which you can also pay into.
If your child earns an income, you can pay up to their Annual Allowance amount into their pension each year, and they’ll usually receive tax relief at their marginal Income Tax rate.
For most earners, the Annual Allowance stands at £60,000 as of the 2024/25 tax year, but it may be tapered down if you are a high earner or if you have already flexibly accessed your pension. The Annual Allowance is the amount you can contribute into a pension without receiving an additional tax charge.
As such, you could be able to pay up to £60,000 a year into your child’s pension tax-efficiently, giving their later-life savings a significant boost and allowing them to free up more disposable income for meaningful life experiences.
Work with a Kellands financial planner to integrate family support into your wealth plans
At Kellands, we understand that you might feel concerned for your children’s financial viability in a time of high costs.
We can work with you and your children to figure out:
- What your collective goals are
- How much support you can afford to offer without compromising your own financial stability
- The potential ways you could give the funds, including the five avenues mentioned in this article
- The tax implications of different financial support options.
If you want to ensure your children don’t miss out on important milestones due to financial strain, we’re here to help.
Email us at hale@kelland.co.uk, or call 0161 929 8838.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning or tax planning.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.
Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.