Tax & Estate Planning

The pros and cons of helping your children out financially

By July 31, 2020 No Comments

Having children can be an expensive business. According to the Child Poverty Action Group, the cost of raising a child (excluding housing, childcare and council tax) from birth to 18 is now £75,436 for a couple family and £102,627 for a single parent/guardian.

It’s not just bringing up children that can be expensive. As a parent or grandparent, you may also want to help them out in their adult life. Perhaps you want to assist with university fees? Gift or lend them the deposit for their first home? Or help by contributing to their savings or retirement fund?

The rise in multigenerational planning

In recent years, there has been an increased focus on multigenerational financial planning.

Including children (and even adult grandchildren) in financial planning discussions can ensure that the right people in the family have the right assets, at the right time. It can also help to minimise potential family conflict and disputes, as everyone has a better idea of where they stand.

For example, including children in discussions about making provisions for later life care, or equity release, can mean they understand that there may be a smaller inheritance than they had previously expected.

It can be difficult to talk frankly about money within a family and to address each generation’s different needs and preferences. However, it’s important for families to work together using this framework:

  • Think about how you want to split your legacy and who will inherit your wealth. Are you going to divide your wealth equally, or base it on need?
  • Consider writing a family ‘mission statement’ to explain how financial decisions are made. This helps to build trust by being transparent and including all parties in discussions.
  • Create a document that captures the current financial situation of every family member. This can help you to make decisions and to approach the dual challenges of increased longevity and the implications it will have for intergenerational financial planning.

What you can do to support intergenerational planning

There are several factors you should consider when you are considering passing wealth through the generations:

  • Inheritance Tax – if you are likely to have an Inheritance Tax liability then it can be beneficial to reduce the value of your estate through gifting. This may be through using your annual exemption, taking advantage of the ‘seven-year rule’ or by making regular gifts out of your income.
  • Pensions – unused private pension funds can be gifted tax-free to heirs, if you are under 75 when you die. If you are over 75, any pension you pass down will be taxed at your heir’s marginal rate.
  • Gifting – parents and grandparents are increasingly passing money through generations while they are still alive, rather than on their death. As well as the potential Inheritance Tax advantages, this can also help younger members of the family at a time when they need it – for example, buying a home or paying for school/university fees.

3 things to consider before you start passing wealth down the generations

While you may have a desire to help your children or grandchildren financially, there are also some factors you should bear in mind. Being generous can have its downsides!

  • A lack of independence

As we have seen, supporting your adult children can have many benefits. However, there can also be some negative consequences.

For example, if your children rely on you for money, they will never learn to be financially independent. When you are no longer around, they may have no idea how to deal with money and get into debt.

If your children are not accountable for their bad decisions, or required to deal with the repercussions, they may repeat past mistakes.

  • It can leave you short of money

There is a fine balance between reducing the value of your estate for Inheritance Tax purposes and leaving yourself short of money in your retirement.

If you have to put aside your own financial goals – for example, by delaying your own retirement or by using funds you had set aside for retirement to help your children – you could actually jeopardise your own financial future.

Taking money out of your personal savings or emergency fund might significantly reduce your financial security. This could make it harder to get through financial hardships that you may encounter in the future, such as a sudden job loss, a major home repair, or an illness.

Withdrawing money from certain types of investment could also see you face penalties and tax charges.

  • Children develop poor financial habits

If you repeatedly ‘rescue’ your children financially, or they become dependent on the contributions you are making, they can develop poor financial habits.

For example, repaying your child’s debts may protect their credit file, but if you don’t insist that they pay the money back to you they won’t understand the consequences of their actions.

By forcing children to tackle their own financial problems, they may learn valuable skills such as budgeting, transferring debt to benefit from lower interest rates, and ‘saving vs buying on credit’.

Taking a step back teaches your children that they can’t simply open the door to the Bank of Mum and Dad every time they need help.

Get in touch

If you’d benefit from taking a multigenerational approach to your financial planning, we can help. Email  or call 0121 313 1370.