How to support your children and grandchildren without compromising your dream retirement

The current high cost of living, combined with record-breaking house prices and high-interest student loans, is making it difficult for younger people to find firm financial ground.

Read more: Should you help pay off your children’s and grandchildren’s student debt?

In response, many parents and older relatives are providing more financial support, often to the detriment of their own financial goals.

In fact, Pensions Age reports that 1 in 7 parents with children aged over 18 are planning to delay their retirement or settle for a more modest one in order to provide their loved ones with increased financial support.

It’s natural to want to help those closest to you. But you don’t need to compromise your own future to do so.

Keep reading to learn how you can support your children and grandchildren by prioritising your own needs, taking advantage of gifting allowances, setting clear boundaries, and encouraging your loved ones’ financial independence.

Financially supporting your loved ones begins with prioritising your own needs

3 in 5 parents of over-18s are now helping their children financially, which is having a lasting impact on their ability to save for their own retirement, Pensions Age finds.

You might sympathise with the younger generations who are facing a challenging economic landscape while trying to build wealth for their futures. But providing too much financial support to your loved ones might jeopardise your own goals or impede their financial independence (more on this later).

Instead, you must strike a balance between your own needs and those of your children. This starts with recognising your own priorities for your wealth.

Begin by asking yourself questions like:

• When do I want to retire?
• What retirement lifestyle do I want?
• Will I have any outstanding debt to pay off?

Setting objectives for your wealth and a practical plan to help you achieve your goals means that your money, first and foremost, is used to support your future wellbeing.

Moreover, it’s important that you establish your own plan and financial security to ensure you have the continued means to support loved ones further down the line.

Set clear boundaries for financial support

Once you have established boundaries for your own financial plan, it’s important that you do the same with the financial support you provide to your loved ones.

These limits preserve your financial security while also ensuring fairness and transparency about the help you are willing and able to provide.

For example, if you provide regular support, set clear terms for how long it will last. If you pay a one-off lump sum, be clear whether the amount is a loan or a gift – this distinction is important for tax purposes.

If you are providing a loan, set a final payment date and offer the same level of support to your other children or grandchildren to ensure fairness.

Adhere to lifetime gifting rules to maximise the tax efficiency of your support

You can make any financial support you provide your loved ones work in your favour by creating tax-efficient wealth, where possible, to benefit your estate planning goals.

Do this by adhering to several HMRC gifting rules and allowances:

• Small gifts allowance – Give as many people as you want £250 per person, per tax year, so long as you haven’t used up your annual exemption on them already.
• Annual exemption – Give one person up to £3,000 or split this amount among several people each tax year.
• Wedding or civil partnership gifts – Give a wedding or civil partnership present of £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else.
• Regular gifts from income – Give from your own surplus income, so long as doing so isn’t detrimental to your own standard of living and payments are regular.

Learn more: The ultimate balancing act: Gifting versus saving

You can give outside of these allowances. However, doing so creates a potentially exempt transfer (PET).

A PET can be IHT-efficient, so long as you live for more than seven years after giving the gift. If you die before the seven years are up, IHT relief is measured on a sliding scale based on how much time has elapsed since giving the gift.

Nurture your loved ones’ financial independence

Supporting your loved ones financially could be a short-term solution to a long-term problem. The only realistic way they can achieve long-term financial security and prosperity is by developing their own financial independence.

There are several ways you can help encourage this behaviour:

• Improve your loved ones’ financial literacy to prepare them for the financial commitments they’re likely to encounter later in life.
• Help them build a budget to organise their wealth and develop a long-term savings plan.
• Mentor them in investing and help them get started building their portfolio.

It’s also important that your loved ones learn how to manage their money on their own – especially if you plan to leave them a sizeable inheritance one day.

If so, you might consider setting them up with a Kellands financial planner.

Our award-winning team can help develop a tailored plan for your loved ones so that they can make the most strategic use of your wealth and theirs to help them reach a financially secure and independent future.

If you’d like to learn more about how we can 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 individuals only.

All information is correct at the time of writing and is subject to change in the future.

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.

The Financial Conduct Authority does not regulate estate planning or tax planning.

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