How to support your adult children financially without compromising your retirement

Helping your adult children financially may feel important, but it could disrupt your retirement if you don’t have a financial plan in place.

According to research published by MoneyAge, 8 in 10 parents act as Bank of Family for their grown-up children. This might seem like a positive way to share your wealth. But spending a portion of your retirement savings on your family could leave you with a shortfall later in life.

Fortunately, you may be able to support your children financially without compromising your desired retirement lifestyle.

Read on to find out how to protect your retirement income needs while also helping your children improve their financial situation.

3 questions to ask before offering financial support to your adult children

Before offering financial support to your children, it’s important to understand what you’re committing to and balance this with your own financial needs.

It might be helpful to ask yourself these three questions:

1. How much money does my child need and how do they intend to use it?

Whether your child has asked for help or you’re considering making an unprompted offer of financial support, having a clear idea of their needs could help you come to an agreement you’re both happy with.

So, while it might feel awkward initially, having an open discussion about how much money your child needs and what they intend to use it for is an important starting point.

This knowledge could help you decide how much support you’re able to give without compromising your retirement plans. It may also allow you to set boundaries and expectations, which may reduce the risk of disappointment and disputes.

Perhaps most importantly, with a clear understanding of the figures involved you can factor these into your financial plan so that your long-term goals aren’t compromised.

2. Will the money I give be a gift or a loan?

The answer to this question could affect how much support you feel comfortable offering.

You might decide to gift your children some of their inheritance during your lifetime, and this can potentially be a tax-efficient way to pass on your wealth (see below for more on this).

However, if you have free capital now, but expect to need it later in life, a loan might be a more suitable option. Your adult child may also feel more comfortable accepting financial support on the understanding that they will repay it in the future.

If you decide to loan your child money, it’s worth setting clear expectations in terms of repayment conditions to avoid misunderstandings. You may also want to seek legal advice and put a formal agreement in place.

3. How could my long-term financial plans be affected by supporting my children?

People are generally living longer than they did several generations ago, so your retirement could last 30 years or more.

Also, your spending patterns are likely to change throughout your retirement. For example, your outgoings may increase towards the end of your retirement if you need to pay for later-life care.

So, careful financial planning is necessary to ensure that you have enough income to cover your needs throughout retirement. In addition to life expectancy and changes in expenditure, you’ll need to factor in the cost of any financial support you intend to provide for your children.

A financial planner can use cashflow modelling to help you understand your retirement income needs, allowing you to gauge a level of support for your children that won’t compromise your lifestyle.

Clever ways to support your adult children financially

Once you have a clear understanding of how much financial support you feel comfortable offering your children, you might want to consider the following options:

Invite your children to share your home for as long as they need

Rent or mortgage payments are typically an individual’s biggest expense, so helping to reduce this cost could provide invaluable financial support to your adult child.

Indeed, in 2023, the Office for National Statistics reported that one-third of adults said it was “very” or “somewhat” difficult to afford their rent or mortgage payments.

So, making your children feel welcome in your home for longer could help them achieve some of their goals – such as completing a university degree – without accruing a potentially unmanageable level of debt. It could also allow them to build up their savings, perhaps for a deposit to buy their first home.

You could agree on a financial arrangement that is more affordable for your child than commercial rents or a mortgage that won’t compromise your retirement plans – you might even be able to accept a peppercorn rent and contribution towards bills.

Use your annual Inheritance Tax allowances to gift your children money

You may have planned to leave assets to your children in your will. However, gifting inheritance to your children during your lifetime could allow you to help them when they need it most. Later in life, they may be more established and need less support.

Making gifts can also be a tax-efficient way to pass on some of your wealth. This is because they fall out of your estate for Inheritance Tax (IHT) purposes, provided you survive for seven years after making them.

There are several annual allowances that allow you to pass on gifts without the recipient incurring IHT. For example, you can use your annual exemption to gift up to £3,000 each tax year without them being added to the value of your estate.

However, the rules on IHT gifting can be complicated, so it’s worth seeking advice from a financial planner to understand how best to use your allowances to pass on wealth tax efficiently.

Contribute to their pension

According to Corporate Adviser 1 in 5 people in the UK have stopped or cut back pension contributions as a result of the cost of living crisis.

If your child has paused their pension contributions, they may be missing out on tax relief from the government, employer contributions and the lucrative effect of compounding returns on their investment. All of which could potentially lead to a shortfall later in life.

By paying into your child’s pension, you could boost their retirement funds and support their long-term financial security. Additionally, moving some of your wealth into your child’s pension could lower the value of your estate for IHT purposes.

However, the amount you contribute to your child’s pension cannot exceed their annual salary or £3,600 if they aren’t working.

Support your adult children to become financially independent

In the long term, both you and your child will probably want them to become financially independent.

To achieve this, it might be helpful to talk about money as a family and share your financial knowledge. This could allow your child to develop their financial literacy and become more confident managing their money.

A financial planner could also support you as a family to progress from short-term financial support to long-term independence.

Get in touch

If you’d like to know more about how to support your adult children financially without compromising your retirement plans, please email us at hello@intelligentpensions.com or call 0800 077 8807.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

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.

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. Past performance is not a reliable indicator of future performance.

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.

Workplace pensions are regulated by The Pension Regulator.

The Financial Conduct Authority does not regulate estate planning, cashflow planning, tax planning, or will writing.