In recent weeks, the phrase “cost of living crisis” has never been far from the headlines. Since late 2021, Brits have suffered a fall in real disposable incomes, caused predominantly by high inflation outstripping wage and benefit increases, and recent tax rises.

The latest Office for National Statistics data shows a surge in energy costs has driven inflation to a 40-year high of 9%. With the Guardian reporting that the energy price cap is set to increase by a further £800 in the autumn, the Bank of England are now forecasting inflation of more than 10% later in 2022.

While you may have seen your own expenditure rise over recent weeks, it’s likely soaring prices and increasing taxes are also affecting your children and grandchildren.

Indeed, recent research published in the Telegraph suggests that 1 in 7 parents are changing their financial plans to help their children cope with the cost of living crisis. Many are doing so by drawing down their pensions earlier than planned or releasing money tied up in their home.

While it’s only natural that you might want to open the doors to the Bank of Mum and Dad, supporting your loved ones could damage your own financial prospects. Here’s what you need to know.

Be careful not to run out of money

You’ve likely built up your pension fund over many years to ensure it can support your desired lifestyle when you retire.

So, dipping into your fund now to help your children or grandchildren could increase the chances of you running out of money in later life. For instance, you may find that you no longer have sufficient assets to pay for any later-life care you need.

Research published by analysts Moneyfacts shows that 4 in 10 Brits have already dipped into their savings to help cope with the rising cost of living over the past 12 months.

Nitesh Patel, from the Yorkshire Building Society, who commissioned the research, says: “The concern is not only the here and now – but the knock-on effect of depleted savings for the future.”

One of the ways we can support you is by using cashflow modelling to establish how gifting money now could affect your future plans.

We can consider all your assets and work out whether you will have “enough” in later life if you provide a gift now and, if not, how your financial plan might need to change.

“Giving while living” could support your family and help you manage a potential tax bill

The idea of “giving while living” has become more popular in recent years. As a parent or grandparent, providing a gift earlier (rather than on death) means that you get to see the positive benefits of the gift.

You can also provide a gift at a time when it makes a real difference to your loved one.

For example, if you left a legacy on your death, your children might be in their 50s or 60s by the time they receive the money. Gifting much earlier could help them when they really need it – for example, to get onto the housing ladder.

There are also positive tax reasons why you might want to gift while you are alive. That’s because you can take advantage of a range of gifting options, each of which can reduce the value of your estate for Inheritance Tax (IHT) purposes.

• The “seven-year” rule means you can gift any amount and, if you survive for seven years after making the gift, it will fall outside your estate. Of course, you’re much more likely to survive for seven years after making a gift earlier in life
• Each individual has a £3,000 annual gifting exemption, so you can gift this amount every year and it will immediately fall outside your estate
• You can make gifts from income, which could be a useful way to support children and grandchildren through the cost of living crisis. Here, you must make gifts from income (not capital), and they must be regular and not damage your own standard of living.

We can help you to plan your financial future

If you want to support your loved ones through this tricky time, you must do so without upsetting your own long-term plans.

We can help you ensure you don’t run out of money in later life or die with too much and leave a substantial tax bill to your beneficiaries.

We can also help you to devise a plan that minimises the tax you pay. For example, taking more than 25% of your pension while you are still working – perhaps because you want to give a gift to a child – could then limit the amount you could pay into your fund tax-efficiently.

If you are thinking of opening the Bank of Mum and Dad, and you want reassurance that this won’t hinder your progress towards your own goals, please contact us today.

Please note

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