How can you help your children or grandchildren prepare for the future without jeopardising your own financial security? asks Jacqui Bateson
Are you planning to help your children and grandchildren financially? It’s a hot topic at the moment and can seem like a minefield – how can you help them and still have the life you want to lead?
One thing is certain – the financial wellbeing of our families is high on the agenda. Data from the Skipton Building Society Retirement Tracker 2016 found 26% of people are not willing to spend less on their children and grandchildren, regardless of their own circumstances.
Young adults under pressure, parents helping out
According to research published by the Intergenerational Foundation in 2016 “young people are under pressure like never before”, facing “high housing costs, precarious employment and declining wages, and increasing student debt”.
And it seems that younger generations are aware of the challenges facing them – we found that 24% of people aged 18 to 24 choose not to save for their retirement, and 45% of this age group say they can’t afford to.
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From the rise of the so-called ‘boomerang generation’ of grown-up children living at home for longer, to giving direct financial assistance, there is plenty of information out there showing how parents are helping. A May 2017 survey by comparison site Go Compare found parents contribute an average of £123.60 a month – close to £1,500 a year - to their children’s living expenses, helping to pay for things like food, mobile phones, clothing, cosmetics and transport.
Meanwhile, L&G’s Bank of Mum and Dad report, published May 2017, found that parents, family and friends will provide £6.5bn in financial help to get loved ones on the property ladder in 2017.
I’m a great believer in taking responsibility and being independent, but I also appreciate the challenges younger generations face, especially when it comes to planning for the longer term and getting on the housing ladder.
The way I see it, I could hang onto the wealth I have with a view to leaving it to my children in my Will, or I could find ways to help them now, when it seems to matter most. But I’m keen to make sure that my money is helping them for the longer term, rather than spent on luxury items today.
Will the Lifetime ISA help?
To help younger generations focus on the future, the government recently launched the Lifetime ISA, which can be opened by people aged 18 to 39 years. If you have a Lifetime ISA, you can pay in up to £4,000 a year, until the day before you turn 50, and the government will also pay a 25% bonus on contributions, up to a maximum of £1,000 per year.
Money saved in a Lifetime ISA can be used to buy a first home, up to the value of £450,000, and/or kept in the account until age 60 to help fund retirement.
Withdrawing funds for other purposes is possible, but will normally be subject to a 25% charge (the only exceptions being terminal illness or death). This means you would get out less than you will have paid in. For example, withdrawing £5,000 from a LISA – the equivalent of a full year’s allowance plus the 25% government bonus – would lead to a charge of £1,250, resulting in a loss of £250 on your contributions.
It’s also important to note that a Lifetime ISA shouldn’t be seen as an alternative to a pension and might not be the best option for retirement savings.
A few providers have launched Stocks & Shares Lifetime ISAs, while Skipton Building Society has launched the first Cash Lifetime ISA.
For those of us able to help our children and grandchildren, adding funds to a Lifetime ISA could be one way to do it. It gives us a way to contribute to their futures, with the additional benefit of the government bonus and some certainty about how the funds will be used.
We each have an annual gift allowance of £3,000, which is automatically exempt from inheritance tax.
If you want to help your children or grandchildren by gifting them money to build up the savings they might have in a Lifetime ISA, it might be worth them considering using some or all of this allowance, as every £1,000 contributed is worth £1,250 (providing they follow the rules). Remember, they’ll be limited to saving a total of £4,000 a year in a Lifetime ISA, including any contributions you might make for them.
And any ‘gifting’ you do today has the potential to save your family paying 40% (or the prevailing inheritance tax rate at the time) on the amount gifted. Inheritance tax planning can be complex, so it’s often worth taking advice.
Intergenerational assistance – does it make sense?
The answer to whether it makes sense to offer intergenerational assistance is probably always going to be yes, if you can afford it and it’s something important to you. There are many ways in which we can help our children financially. It seems to me that it makes sense to help in ways that are helpful in the round.
At Skipton Building Society we are committed to helping you plan for your life ahead. If you want help and time to pause and plan then feel free to get in touch.
Retiresavvy is brought to you by Skipton Building Society. This article has been commissioned by retiresavvy and any opinions voiced are the author's own.