How many people rely on your pension? If you find yourself regularly giving money to your children and grandchildren, you may be among the 31% of retirees who choose to give part of their income to younger generations.
According to research from Prudential, most of those people give away an average of £360 each month, while 20% generously provide help for their family to the tune of £500 per month.
This money is most frequently used to help children (56%), but other relatives could also see a cut of that, with:
- 25% giving money to grandchildren
- 8% supporting their parents
- 2% offering financial help to their grandparents
There are several reasons behind retirees gifting money to their relatives, including food, travel, education and helping first-time buyers. But, regardless of reason, what really matters is whether you can afford to give money away at all, and if so, how will you do it efficiently?
Can you afford to give money away?
Your heart might tell you to help your loved ones as much as possible, but your head may be wondering whether it’s truly affordable. Even if you can live without the money in the short-term, is it going to affect you on a more long-term basis?
The answer is financial planning. Engaging with a financial adviser will give you an insight into your financial position which may not have otherwise been apparent.
A financial planner will start by looking at the bigger picture; your overall financial situation, including what you have available and how long you expect to be retired for. Using that information, they will then break down the options surrounding how you use that money to achieve the lifestyle you want. This will reveal how much you can afford to give away to loved ones, if any, whilst accounting for the financial buffer you may need in later life for care and living costs.
How can you make it efficient?
If you can afford to give money to help support your children and grandchildren, how you go about it will impact how that money is taxed.
If you choose to give a lump sum to a loved one, it may be classed as a Potentially Exempt Transfer (PET). The recipient may have to pay Inheritance Tax on this amount, if you should die within seven years of giving it away.
Alternatively, you may choose to give regular gifts to your loved ones, in order to provide more longevity in your support. Doing this may prove to be more tax-efficient, as gifts from income are considered to be outside of your estate for IHT purposes, as long as certain conditions are met:
- You can prove that these gifts are intended to be regular and that you are committed to continuing the arrangement.
- The gifts are made from your normal income, rather than savings and investments.
- You have sufficient income to support your normal lifestyle after making the gift.
Could living inheritances be the answer?
Helping loved ones financially while still alive is sometimes known as a ‘living inheritance’. This activity is becoming more and more popular, as retirees start to look at the benefits of giving cash away early, rather than waiting to leave it in their legacy. These benefits include:
- Being able to help relatives at a time when they need it most
- Being able to see loved ones enjoy the extra help
- Potentially having a say in how the money is used, rather than worrying that your wishes will be disregarded
Communication and decision making
If you do decide to give money away to loved ones, it is important to talk about how it will be used and whether that money will be given as a gift or a loan. If it is the latter, it may be worth having an agreement put in writing to protect both parties.
For more information or to learn more about IHT and estate planning, get in touch.