Saving for Retirement?
Saving for Retirement or Supporting Your Children?
If you listen to the media you would be forgiven for thinking that every parent out there is acting as the Bank of Mum and Dad, providing their kids with deposits for homes, paying off university debts and performing various other financial miracles. All while saving for retirement themselves.
While that’s not quite true, a whopping 52% of parents help their children with expenses. 17% provide assistance with a home deposit, and 7% help with mortgage repayments.[i]
It’s only natural to want to help and support your children, but the unintended consequence of this help can be a significant impact on your retirement finances. So what are some ways you can help your children out, and still ensure you have enough to retire comfortably?
Financial Help – Big and Small
The Bank of Mum and Dad don’t only help with home deposits and mortgage repayments. Financial help can range from helping with groceries, to picking up the tab for holidays, or covering car repairs. These bills might not seem big, but they add up, and this can significantly impact your ability save for your retirement in those vital last years of working, particularly if you have more than one child.
Help Comes in Many Forms
If your retirement savings don’t allow for you to hand over a large chunk of cash, there are other ways you can help your children in their quest for home ownership. Perhaps your children could live with you rent-free while saving for their deposit. Or you can help with childcare one or two days a week, allowing your kids to save that money instead. Thinking outside the financial box can be beneficial for both you and your children.
The Impact on Tax and Government Benefits
If you are approaching retirement and thinking of gifting a sum of money to your children, bear in mind the impact this may have on your pension eligibility.
Any money you ‘gift’ when retired, or in the five years prior, is considered when determining your pension eligibility. This means, if you have given away a portion of your retirement savings, not only will you not have access to that money, but the government will still take it into account in your asset test, thereby creating a double whammy to your income.
So if this is something you are considering, and you have the funds available before retirement, it’s best to get it out of the way as early as possible.
Alternatives to Gifting
There are a number of options for helping out financially without emptying out your retirement savings and leaving yourselves short of capital funds or income. You could consider:
- Purchasing a property with your child as tenants in common. This means when the property is sold, you both receive any capital gain, minus CGT of course.
- Purchasing a property in your own name and allowing your children to live there at an agreed rent. You will continue to receive an income, and when the property is sold you can choose to keep the capital gain, or gift it to your child for a deposit of their own house purchase.
Mini Case Study – It’s Important to Protect Yourself
No matter how much you trust your children, you need to protect yourself in this process. As you will see from this Mini Case Study, even with the best of intentions things can go wrong. So whatever arrangements you come to with your children, have them set out in a legally binding document. Not only will it protect your finances, but it will protect your relationship from future misunderstandings.
Mini Case Study – Dave and Lucy
Dave and Lucy wanted to help their son Ty and his wife Ashley when they found their dream home. They needed a deposit of $156,000, but only had $25,000. So Dave and Lucy withdrew $131,000 from their superannuation expecting it would be repaid over time.
A few years later, Ty and Ashley divorced. Once the house was sold and the bank was repaid they were left with $230,000 to be divided between them.
Dave and Lucy requested their $131,000 back, as they were worried about the lack of working capital in their pension fund. Unfortunately, at the time the money was given to Ty and Ashley no loan or repayment agreement had been signed, and the divorcing couple claimed the money had been a gift.
Dave and Lucy now had no way to recover their money. What’s more, Ty’s ex-wife walked away with half of it.
A simple loan agreement drafted by a solicitor at the outset could have ensured Dave and Lucy got their money back, and avoided the resulting damage to their relationship with their son.
It may seem mercenary or mean. Especially if your friends are helping their children, or you are under pressure to help, but you’re not doing anybody any favours if you put yourself in a precarious financial position that could mean your children need to help you out later in life. Advice from a qualified financial advisor can help you make informed and considered decisions now that will ensure you are secure for life.
If you would like advice on whether you can afford to help your children while ensuring you have sufficient savings for retirement, Many Financial Services have the understanding, experience, and skill to help. Give us a call on (02) 9976 3388, or contact us via the below link.