How to help your children through the cost of living crisis without endangering your long-term plans

Category: News

The Telegraph recently reported that 1 in 7 parents are changing their financial plans to help their children through the current cost of living crisis.

While wanting to help your children financially, if you can, is understandable, have you considered the implications for your own long-term plans?

Some parents are opting to withdraw from their pensions early to help out loved ones. Others are looking to release the value tied up in their homes.

Keep reading to find out how you could use “giving while living” to open the Bank of Mum and Dad without upsetting your financial future. But first, a recap of the current financial climate.

Inflation has reached a 40-year high with household bills soaring

Supply chain issues, rising fuel prices, and the war in Ukraine have affected global economies already struggling to recover from the coronavirus pandemic.

The Office for National Statistics recently confirmed that inflation reached a new 40-year high in the 12 months to May 2022, hitting 9.1%. Forecasts now suggest that it will peak at around 11% by October and not return to the Bank of England’s own 2% target until 2024.

As the price of goods on shelves increases, fuel bills are rising too. The energy price cap increased by 54% in April. In May, the Guardian confirmed a further rise is expected in October, set to cost households a further £800.

Rising costs mean that families are struggling to make ends meet.

A recent Resolution Foundation report suggests that the current crisis could push 1.3 million Brits into absolute poverty this year. Meanwhile, Moneyfacts confirm that 40% of savers have already dipped into savings to help manage the crisis. Now parents are finding themselves helping out their children too.

But how can you help your loved ones without damaging your long-term plans?

Consider gifting a living inheritance

“Giving while living” could be the most tax-efficient way to open the Bank of Mum and Dad during the cost of living crisis.

You might already be planning to leave your children an inheritance in your will. If so, consider whether passing your wealth on while you are still alive might be a more tax-efficient way to help your children now, when they need it most.

There are financial and wellbeing benefits to this approach.

Financial benefits to giving while living

Gifting while you are alive lowers the value of your estate for Inheritance Tax (IHT) purposes.

IHT is payable at 40% on any wealth above a certain threshold, known as the “nil-rate band”. This is currently frozen at £325,000. If you plan to pass on your home, you can make use of the residence nil-rate band, currently frozen at £175,000.

You can gift any amount you like during your lifetime. Your loved ones will only pay IHT on this gift if your estate becomes liable for it, and you die within seven years of making the gift. This is known as the “seven-year rule”.

If you die between three and seven years after making the gift, the rate payable will be based on a sliding scale known as “taper relief”.

You can use some HMRC exemptions to make gifts that are tax-free regardless of how long you survive after making the gift. These include the:

  • Annual Exemption, which allows you to gift £3,000 a year tax-free, with the option to carry forward any unused amount for up to one year.
  • Normal expenditure out of income exemption, which allows you to make regular gifts as long as they are made from income and don’t affect your standard of living.

Wellbeing benefits from giving while living

The main benefit to gifting a living inheritance is that you are still around to see the difference your money makes.

You might also find that your children receive the money when they need it most.

Inheriting on death, by which time your children might be in their 50s or 60s, might help during their retirement. But more important milestones – such as buying a first home or starting a family – occur much earlier in life.

You might decide that helping to manage a rising cost of living is the best use of your funds.

Be sure to plan for the unexpected now

Whichever way you decide to open the Bank of Mum and Dad, you need to plan for the unexpected now to ensure you don’t run out of money in retirement.

With life expectancy rising, you might need to maintain your desired lifestyle for another 30 or 40 years after finishing work.

You’ll have to think carefully about your potential income and expenditure throughout those decades. Planning for the unexpected is crucial too.

Costs associated with later-life care can be huge. Factoring this into your long-term financial plans is very important. So too is calculating the impact of opening the Bank of Mum and Dad on the fund you have put aside for later life.

Cashflow modelling can help here so be sure to contact us before you decide to help your loved ones financially.

Get in touch

Please email or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you.