Key things parents should consider before giving financial help to their adult children

Thinking about giving your adult children some financial help? Here are some need-to-knows to consider first…

It is natural to want to pass money down the generations, but you may want to check some aspects of your finances first (Alamy/PA)

One in five (19%) parents with adult children are giving them money in order to help them save, new research reveals, as household bills continue to squeeze budgets.

A third (33%) of these parents are siphoning off money from their own long-term savings pots to provide for their adult children, according to Aldermore bank.

For some parents, giving their children a helping hand onto the property ladder is a key reason why they are handing over money.

Nearly two-fifths (38%) of parents have either already helped or are planning to help their children with a deposit for their first home, according to the survey carried out by Opinium.

Alex Myers, director of savings at Aldermore, says: “It’s only natural that parents will want to help their children continue to build their financial reserves.

“It’s also likely we’ll see this trend continue for some time, as the effects of the cost-of-living crisis continue to reverberate. However, it’s important where possible for parents to strike a balance and consider their own financial goals such as retirement and long-term care costs. Only then can they ensure their own personal savings goals are realised.”

The findings come after a survey for Hargreaves Lansdown last year found around a third of people have given a family member £5,000 or more – or plan to.

Like Aldermore’s survey, the Hargreaves Lansdown research indicated that giving a loved one a helping hand onto the property ladder was a key reason for handing over money.

After that, the second most common reason for giving money was the intention for it to be a “no strings” gift.

University costs, weddings and paying off debts were found to be common reasons for gifts being given with no expectation of repayment.

As well as the warm glow parents can get from helping out younger generation, it can make sense financially to pass some money on.

Sarah Coles, head of personal finance at Hargreaves Lansdown says: “Giving money to your family during your lifetime has some fundamental upsides.

“Not only do you get to see it make a difference to their lives, you also have a gifting allowance of £3,000 each year which falls out of your estate for inheritance tax purposes immediately. You can give bigger gifts and, as long as you live another seven years, it will also fall out of your estate. It means your generosity can cut a potential inheritance tax bill.”

Some people may benefit from professional advice about what they can give away tax-free throughout their lifetime.

Something else to be clear on is whether the money is intended as a loan – or indeed a “no strings” gift.

Coles says: “There’s always the worry that your family will waste money you give them, or spend it on something you don’t approve of, so some people will try to make a gift on the understanding it’s spent on something specific.

“In reality, this isn’t easy. You may be able to persuade them to spend it as you want.

“However, legally, the only way to be absolutely certain of how the money will be spent is to make the gift in trust for a specific reason and make yourself a trustee – so you only free up the cash for things you approve of. However, this is a complex area and can be expensive.”

And while helping children onto the property ladder is another common goal for parents, it could be worth considering other options which could also help.

Lifetime ISAs come with a bonus and can be used by people saving for their first home. Some lenders also offer low deposit mortgages for people trying to get on the property ladder. For example, Yorkshire Building Society launched a £5,000 deposit mortgage for first-time buyers in March and Skipton Building Society offers a mortgage which helps renters to make the jump on to the property ladder, potentially with no deposit needed, subject to terms and conditions.

Some lenders also offer mortgages where family members put up savings as security for a certain period that they later receive back. Barclays’ Family Springboard mortgage does this.

Finally, considering your own financial position is also key when considering offering a money gift. Some parents may be still some way off retirement, so it’s worth checking any pensions and other savings.

The Pensions and Lifetime Savings Association (PLSA) has retirement living standards, which can give an indication of what sort of income people might need in retirement to be able to achieve certain standards of living.

People can also check their state pension forecast on gov.uk as well as on the HM Revenue and Customs (HMRC) app. For some, it may be worth paying voluntary contributions to fill gaps in their national insurance (NI) record, which may help boost their state pension income.

Coles says: “We always want the best for our children, so we may be tempted to push our finances to the limit to support them.

“However, there’s a risk we go too far. Some parents will sacrifice their own standard of living to help their adult children get onto the property ladder or go to university.

“Others will eat into pension pots from the age of 55 – and dent the income they can take later in retirement. Some will give substantial gifts, and run the risk that they won’t have the money to pay for care if they need it.

“It’s always a good idea to understand the full impact of your generosity, because if you end up giving too much, you may end up needing them to support you later in life, leaving them no better off overall.”