During the festive period, you might be planning to give wealth to your loved ones. This may be a one-off gift, but for many of us, offering financial support is an ongoing priority.
Adult children may need help reaching important milestones such as buying their first home or getting married. Equally, your elderly parents might need your support with everyday expenses or the cost of care.
However, it’s important that you consider your own future when deciding how to help your family.
Many high net worth individuals are sacrificing their own finances to support loved ones
It’s becoming more common for high net worth individuals to offer financial support to their children and parents, but many are doing so at the expense of their own goals.
According to Credit Connect, 42% of high net worth individuals are using excess income to fund support.
In comparison:
- 31% have sold investments
- 18% have cut back on lifestyle spending
- 12% have either dipped into their pension pot or cut back on contributions.
While these options might free up funds to give to family in the short term, it’s important to consider the long-term effects they could have on your financial plan.
For instance, if you sell investments or reduce your pension contributions earlier in life, you might struggle to build adequate wealth to fund your own retirement.
Equally, if you access your pension earlier than planned, you may use up a portion of your tax-free lump sum. You will also trigger the Money Purchase Annual Allowance (MPAA), which limits the number of tax-efficient contributions you can make to your pension in the future.
This means you could end up paying more tax than you otherwise would have done when you eventually use the pension to fund your own retirement.
All this isn’t to suggest you shouldn’t help your loved ones when they need it, but it’s crucial to balance this support with your own long-term financial stability.
Carefully consider the effects of gifting a large lump sum
Many parents gift lump sums to their children to help with buying a house. In fact, Mortgage Solutions reports that 52% of first-time buyers in 2024 were assisted by family, with an average gift of £55,572. You might also give a lump sum for other reasons, such as a wedding.
Before doing so, it’s important to consider how this outlay will affect your own position in the future.
We can use cashflow planning to consider how much you are likely to have in savings, pensions, and investments based on your current monthly contributions and predicted growth.
Using the forecasts, we can then model various scenarios, such as gifting a lump sum to a child, and see how this will affect your financial position now and in the future.
We might find that you’re able to gift a lump sum and still meet your own goals. On the other hand, the forecasts might show that spending a large portion of your savings now will disrupt your financial plan.
Using this information, you can determine what level of support you can realistically afford to offer.
Review your budget before helping with regular payments
You may help adult children or ageing parents with their general expenses if they are struggling to manage the rising cost of living.
If you transfer lots of small sums as and when your loved ones need help, it’s easy to lose track of how much you’re spending. This might mean that you sacrifice your own lifestyle, or don’t have as much disposable income to put into savings and investments.
That’s why it’s important to account for all spending, no matter how small.
We can help you review your monthly budget and decide how much you can afford to give your family each month. By sticking to this limit, you can ensure the support you offer is sustainable.
Take advantage of the estate planning benefits of helping loved ones
As well as helping the recipient, gifting wealth while you’re alive could benefit you from an estate planning perspective.
When you pass away, your beneficiaries will pay Inheritance Tax (IHT) on any portion of your estate that exceeds your “nil-rate bands”. If you can reduce the size of your estate so less of your wealth exceeds the threshold, you might be able to cut the amount of IHT your loved ones pay.
Supporting your family with lifetime gifts could be an effective way to achieve this.
However, the rules around gifting and IHT can be complex. For example, the first £3,000 you gift each year is automatically IHT-free. But further gifts will only be exempt from IHT if you survive for seven years after giving them.
There are also separate rules that govern small or regular gifts.
Misunderstanding the gifting rules could mean you unknowingly trigger a tax charge, and your family pays more IHT than expected.
We can explain the various allowances and exemptions to you, so you can take full advantage of the estate planning benefits of financially supporting your loved ones.
Get in touch
With our help, you can look after your family financially this Christmas and beyond.
Please get in touch or email us at advice@mlifa.co.uk for more information.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, cashflow planning or tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.