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4 ways to support your adult children without disrupting your retirement

Helping your adult children financially may be important, but it can eat into your savings. Here’s how to support your adult children without disrupting your retirement.

11/07/2023
Benchmark customer focused

A report from Royal London [1] found that 25% of financial advisers have had requests from clients to release funds to help adult children. It is only natural that you might want to support your children during the cost of living crisis, but you may also want to consider how this could affect your own financial plan.

That’s because using a portion of your retirement savings to help your children now could leave you with a shortfall later in life, and this may mean that you make compromises on your desired lifestyle in retirement.

Luckily, it may be possible to have the best of both worlds and give your children the support they need, while also reaping some financial benefits for yourself. Here are four ways you can support your adult children without disrupting your retirement plans.

1. Give gifts

If your adult children need some financial help, gifting money to them may be a good option for two reasons: firstly, you can give them direct support now; and secondly, it could reduce the Inheritance Tax (IHT) that they may pay on your estate when you die.

That’s because gifts can fall outside of your estate for IHT purposes, provided you survive for seven years after making them.

Furthermore, you can gift up to £3,000 each tax year that won’t be included in the value of your estate. You can carry one year’s allowance over, meaning you can potentially gift up to £6,000 tax-efficiently in one year. Additionally, each parent can gift £5,000 for a wedding or civil ceremony without a tax charge.

Alternatively, instead of gifting a lump sum to your adult child, you can give them regular “gifts from income”. This could include paying their rent or mortgage, or giving them money for essentials like food or utility bills.

These gifts may fall outside of your estate for IHT purposes provided they meet certain criteria, and they may not count towards your gifting allowance. For a gift to fall outside of your estate, it must:

  • Be paid regularly
  • Come directly from your income – if you use funds from savings, for example, it likely will not qualify
  • Not affect your lifestyle.

However, the rules surrounding this type of gift can be complex and it may be useful to seek advice. 

Gifting money, either as a lump sum or a gift from income, offers multiple benefits because your child can use the money now to help them cover living costs, weddings or civil ceremonies, or get onto the property ladder. Meanwhile, it might see them save on IHT when you pass away, too.

2. Contribute to their pension

According to PensionsAge [2], 26% of large UK companies reported an increase in the number of employees opting out of making pension contributions, while 29% of people have stopped saving money due to the cost of living crisis.

If your adult children are in this situation, they could be missing out on valuable savings in their pension, and it may be difficult to make up the shortfall later in life. That’s because the earlier they invest, the more they are able to benefit from compound returns.

Indeed, figures from Hargreaves Lansdown [3] show that if they invested £1,000 in their pension at the start of each year for 20 years then, assuming 5% annual growth with dividends and interest paid annually, they would have £35,188 from £20,000 worth of contributions.

However, if they pause their contributions, they may not benefit as much from compounding. The good news is, you can ensure their savings continue growing by contributing to their pension, even if they have reduced or paused their contributions.

Furthermore, your child will still continue to benefit from tax relief on these contributions. That’s because, when you contribute to your child’s pension, it is treated as if they made the contribution themselves. This means they receive tax relief at their marginal rate.

By doing this, you also reduce the value of your estate, meaning that your family could pay less IHT later on.

3. Help with childcare

Childcare can be a significant financial burden on your adult children, as MoneyHelper [4] reports that the average cost of a full-time week of care is £269.86.

Fortunately, if you have not yet reached State Pension Age, helping them out with childcare could benefit you both. That’s because you may be able to claim additional credits to fill gaps in your National Insurance (NI) record and ensure you receive the full amount of State Pension.

Ordinarily, you must earn at least £6,396 in a year (or £6,725 if you are self-employed) to receive a qualifying year on your NI record, and you need 35 years’ worth of credits to receive the full State Pension.

However, if you do not have a full NI record, perhaps because you were out of work for a period, lived abroad, or did not earn enough, you may not receive the full amount.

This means that you could be missing out on valuable income in retirement. That’s why it could make financial sense to help adult children with childcare.

If you were looking after a child under the age of 12 and their parent claims Child Benefit, you may be eligible for a “Specified Adult Childcare” credit for that year if you did not meet the earnings threshold.

That means if you help your adult child with childcare, they can make a big saving on childcare costs and you may be able to use the additional credits to reach the 35-year threshold and ensure you get the maximum State Pension.

This is £203.85 a week in the 2023/2024 tax year, so it could potentially be a significant boost to your income in retirement.

4. Refer them to an adviser

Gifting money, making pension contributions on their behalf, and helping out with childcare are all excellent ways to support your adult children in the short term. However, you should also consider ways to help them build financial stability in the long term, and taking advice is one of the most powerful ways they can do that.

That’s why now may be a good time to refer them to an adviser who can give them guidance on important areas such as pension savings and investments.

Get in touch

Supporting your adult children may be a priority during the cost of living crisis, and we can help you find ways to do it while also maintaining your own financial plan.

Please visit our contact page or speak to your adviser.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

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

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 results.

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.

[1] 19.05.2023 Retirement troubles in store as adult children live with parents Royal London

[2] 19.05.2023 Over a quarter of employers report increase in pension opt-outs PensionsAge

[3] 19.05.2023 Why is compound investing in a pension so powerful? Hargreaves Lansdown

[4] 19.05.2023 Average childcare costs MoneyHelper

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Benchmark Financial Planning is an Appointed Representative of Best Practice IFA Group Limited which is authorised and regulated by the Financial Conduct Authority, the registration number is 223112. Registered office: Broadlands Business Campus, Langhurst Wood Road, Horsham, West Sussex, RH12 4QP. Registered in England and Wales No 07572431.

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