How to help the next generation while staying financially stable yourself

If one of your top priorities as a parent or grandparent is to provide opportunities for the next generation, you are not alone.

A March 2023 Royal London survey of Financial Advisers revealed that 55% said their clients are more worried about their families’ financial wellbeing than their own, and 25% of recent requests from clients have been about releasing money for their adult children.

In the next few years, you could plan to pass wealth to your children or grandchildren for any of the following reasons:

• Helping them onto the property ladder
• Supporting them in their early career years
• Paying for a wedding, honeymoon, or another milestone
• Putting funds into a pension or trust on their behalf.

While these are admirable goals to have, it is crucial to assess your own financial situation before you help others.

Releasing capital for your children now might provide them with amazing opportunities, but without proper planning, you could damage your future financial viability – especially if you are retiring soon or are already retired.

Here’s how to help the next generation financially while keeping your own wealth stable.

Review your potential retirement income using cashflow modelling software

One of the first, and perhaps most important, steps to take before offering wealth to the next generation is to check that you can afford it– especially if you are approaching, or already in, retirement.

Your Financial Planner can use cashflow modelling software to help you review your wealth circumstances in granular detail.

Cashflow modelling, also known as “cashflow forecasting”, contains the following features that might help you understand how much you can afford to give away. This software can:

• Look at all your different retirement income streams, such as the State Pension, defined contribution (DC) pension withdrawals, and income from investments, as one big picture
• Factor in your life expectancy and retirement age, to see how long your retirement funds may need to last
• Review your regular expenditure, and assess how this may change over the years
• Help you plan for the cost of later-life care
• Consider how much tax you may pay on your retirement income
• Plan for any expected windfalls, such as an inheritance or money from a property sale
• Calculate the potential effects of inflation on your wealth over time.

While nothing is ever set in stone, working with a Financial Planner and using cashflow modelling could make all the difference when planning to give wealth to the next generation.

With this professional outlook, you may be able to confidently pass wealth on now without worrying about your financial viability down the line. Or, if you’ve overestimated how much you can give, cashflow forecasting can allow you to adjust this accordingly.

Ensure you are aware of the tax you may pay when helping others

If you are drawing from a Defined Contribution (DC) pension or liquidating investments to help your children and grandchildren with their own lives, it could be constructive to look at the tax bill you could pay when you do.

Here is some key information about drawing from invested assets in order to help others.

Taking funds from your DC pension to help the next generation could increase your Income Tax bill

No matter which method you choose to access your DC pension pot, 25% of it can be taken tax-free. If you draw the funds flexibly, each withdrawal beyond the 25% tax-free amount will usually be subject to Income Tax at your marginal rate.

So, if you take a large sum from your pension all at once, with the purpose of passing it to the next generation, your Income Tax bill could increase in line with the amount you draw.

For instance, if you usually pay basic-rate tax (20%) on your later-life income – including the combined withdrawals from your DC pension, your State Pension payments, and any other income you receive – taking a larger amount than usual from your pot could push you into a higher tax band.

The Royal London report found that 18% of Financial Advisers’ clients are already dipping into their pensions to provide lump sums to family members. If you are one of them, it may be advantageous to review any plans to make large withdrawals from your pension with a Financial Planner before you act.

Cashing in shares for loved ones could incur a Capital Gains Tax bill

When you earn more than £6,000 in profits on non-ISA shares and business assets in a single tax year, you will typically pay Capital Gains Tax (CGT) on the remaining amount. This will fall to £3,000 in April 2024.

The rate and amount of CGT you would pay depends on multiple factors, including:

• The value of the assets you’re selling
• Your marginal rate of Income Tax
• The type of asset you’re selling (for example, you may pay a different rate on property than on shares).

Importantly, if you plan to liquidate a portion of your investment portfolio to give cash to your children or grandchildren, you may pay CGT on some of this wealth.

It’s crucial to assess your tax situation before promising money to the next generation, so you can gain an accurate picture of what you can afford, and avoid compromising your financial stability in retirement.

Discuss your plans openly with your children and grandchildren

Another important step to take when giving funds away to loved ones is to be open and honest with them about your plans.

Your children and grandchildren may not be aware that you plan to give them money sooner rather than later; on the other hand, they could expect to receive more than you can afford to give.

So, once you have reviewed your circumstances with a Financial Planner and and understand what is affordable, it could be wise to have a chat with the beneficiaries of the funds well in advance of a wealth transfer.

Whatever your situation, being frank about what you can offer, and over what timeline, is essential. This open-book approach can ensure everyone is on the same page and help to avoid unnecessary conflicts down the line.

Get in touch

A PenLife Financial Planner can work with the whole family to produce a gifting plan that works for everyone. For help with passing wealth to loved ones without compromising your own future, email us at enquiries@pen-life.co.uk, or call 01904 661140.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate cashflow planning.

The value of your investment 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.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

All information is correct at the time of writing and is subject to change in the future.