Bank of Mum and Dad – can you afford to gift a lump sum without jeopardising your future plans?

As the cost of living crisis continues to apply increasing pressure to household finances, parents acting as the Bank of Mum and Dad could risk their own financial security.

With 54% of UK adults concerned about how the rising cost of living might affect themselves or their household, research from Canada Life reveals that almost half (48%) of people providing family members with financial support will struggle to maintain their generosity in the coming year.

The cost of living crisis is now causing a re-think

The Bank of Mum and Dad has long been a useful source of money for younger generations. But the cost of living crisis means that we could see the trend of supporting family with financial help start to reverse.

As inflation soars (as of October 2022, UK inflation remains at a 41-year high of 11.1%), interest rates have also risen eight times since December 2021. So, a growing number of families are being forced to make tough financial decisions.

35% of parents have gifted money to their adult children

Other research, this time from Just, revealed that over the last decade, since 2012, more than a third (35%) of parents aged 45 and over with adult children had gifted at least £5,000 to them to help cover major expenses, for things such as:

  • Weddings
  • House deposits
  • Education fees
  • Financial help through the current cost of living crisis.

As a parent, it's natural to want to help your child. However, it's important to make sure your generosity now doesn't negatively affect your future financial wellbeing.

3 tips for successfully providing financial support to your offspring

Read on for three tips for how you can successfully support your children without risking your own plans and ambitions.

1. Have an open discussion with your children if you are considering providing support

Before you commit to giving financial support, check how much your child needs and how they intend to use it.

Having a clear conversation about how much they have saved and the amount they will need can help ensure you’re all on the same page.

It will also give you a clear figure for when you're looking at your financial plan and considering where to draw the funds from.

2. Decide if it will be a gift or loan

The Bank of Mum and Dad is often associated with gifts, but many parents opt to loan the money to buy a property.

Reviewing your finances and long-term plans can help you decide if a gift or loan is right for you.

If you have capital available now but expect to need it later, to fund retirement for example, a loan might be a better option.

When loaning money, make sure all parties are clear about your expectations and the terms:

  • What repayment schedule will your child need to stick to?
  • What will happen if they can’t meet the repayments?
  • Will you charge any interest?  

Going through these details may feel a bit formal when you want to support your child, but it can help to avoid potentially damaging misunderstandings.

You may want to take legal advice and put a formal agreement in place.

3. Consider if it will affect your long-term financial security

If you’re able to offer financial support, stepping in to help will be a natural instinct. However, make sure you take the time to consider how it may affect your own financial security.

Would taking a lump sum out of your assets now affect your lifestyle or long-term plans? Would you still have enough to cover unexpected costs later in life?

Meeting with your financial planner to discuss your plans to gift or loan a deposit can help you understand all the potential implications.

Using cashflow modelling, your financial planner will be able to show you how lending or gifting money will affect your long-term financial plan. This should mean that, when you offer support to your children, you can do so with confidence.

Get in touch

If you want to lend financial support to your loved ones but are concerned about the effect it could have on your future plans, we can give you confidence you need to reach a decision. We’ll help you make it part of your financial plan alongside other goals you have.

Email us at enquiries@alexanderpeter.com or call us on +44 1689 493455.

Please note:

The content of this newsletter is offered only for general informational and educational purposes. It is not offered as and does not constitute financial advice.

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