According to Finder.com, 44% of Australian parents feel the urge to subsidise their adult children’s lifestyles. Besides helping with expenses such as university fees, utilities bills, etc., as home ownership moves beyond many young peoples’ reach, parents provide a leg-up into the housing market.
It’s natural to want to ensure your children’s financial security, regardless of their age, but is it possible to do so without sacrificing your retirement situation?
We say yes, but consider these points first:
Retirement savings
Already retired? Withdrawing a lump sum can potentially reduce your pension payments, or erode your savings all together. With life expectancy rising we face the reality of outliving our savings. What then?
Approaching retirement? There’s limited opportunity left for accumulating superannuation savings so any deviation from your retirement strategy could have dire consequences. To understand how that pans out, re-read the paragraph above.
Gifting and loaning
Gifting cash to family carries no tax implications, however when gifting assets like property or shares the Australian Tax Office (ATO) considers it the same as you selling the asset which could attract capital gains tax.
If gifting money or assets while receiving government benefits, the gift may still count towards your income and assets tests leaving you worse off if the amount of your benefit includes assets you no longer own.
Consider lending the money rather than gifting it for the following reasons:
- It’s not poor parenting to consider your own needs too!
- Children may become dependent on the additional money; there’s a difference between supporting your child’s lifestyle and enabling
- Some kids come to expect handouts from the Bank of Mum and Dad. Certainly give them a helping hand, but ensure you teach them independence. A loan should be a once-off thing, perhaps with interest.
- If you have more than one child, lending money and agreeing on a repayment plan removes the risk being seen to favour one over the other.
The legals
When lending money to children, it’s important to document the details and have all parties in agreement.
You may trust your kids, but so did retirees Dave and Lucy.
Their son Ty, and daughter-in-law Ashley, found their dream home for $780,000 but only had $25,000 in deposit. To make up the required 20%, Dave and Lucy withdrew $131,000 from their super expecting it would be repaid over time.
A few years later, Ty and Ashley divorced. The house, a joint asset, was sold for $840,000 with a balance of $610,000 owed to the bank. 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.
The divorcing couple claimed that the money had been a gift as they had neither signed a loan agreement nor made loan repayments.
Dave and Lucy had no way to recover their money. By asking their solicitor to draft a simple loan agreement at the outset, they could have avoided the resulting disagreement. Not only did the pair lose their money, but their relationship with Ty suffered.
It’s natural to want to assist the kids, and it’s true: you’ll always feel responsible for their wellbeing. But think of yourself too – you’ve earnt your retirement!
By discussing your needs with your financial adviser, you can set realistic retirement goals that include helping your children, if necessary.
Nobody wins if you outlive your money, so plan today for what you’ll need in the future. You’ll stay on top of your retirement finances and live your best life – whatever that means for you.