Want to give relatives some of your retirement savings? 5 tips from financial planners to read first
A fifth of over-55s expect to spend some of their money supporting their family, but how should you go about it?
Around one in five over-55s (22%) are planning to spend some of their retirement savings on supporting their family financially, according to research by retirement living provider, Audley Villages.
And among those in this age group who have reconsidered how they want to use their retirement savings, as a result of the pandemic, nearly a third (31%) want to spend more on their family.
It can be hard to know where to start when passing on wealth – while also making sure you also have enough to live on. Unsure how to go about it? Here are some tips from financial planners…
1. Use your pension wisely
People with a defined contribution (DC) pension have flexible options for their savings from the age of 55. Emma Watson, head of financial planning at Rathbone Investment Management, says: “From age 55, you can usually take up to a quarter of your pension savings as a tax-free lump sum and this can be useful for parents looking to help their children with a house deposit, big purchases, or to help them set up savings for their future.
“However, before accessing your pension, you’ll want to think about the impact this might have on your future finances. There’s little point giving a significant sum away, if it means you’ll be left financially vulnerable and potentially a burden on your loved ones in the future. Working with a financial adviser will help you to understand how much you can afford to share now, without compromising on your own retirement plans.”
Watson says considering how you might be able to boost your retirement savings is also worthwhile, as it will give you a bigger pot of wealth to start from.
“One way to do this is by increasing your national insurance contributions to make up for any gaps in your employment history, thereby maximising the state pension you will receive,” says Watson. “Every little helps, and the more you have in your pot, the more you will be able to support your loved ones.”
2. Make use of gifting rules
Many plan to use life savings to help out relatives
Watson continues: “There are plenty of rules that enable you to gift money to your children or grandchildren. For smaller gifts, you can gift up to £3000 per year tax-free. There are also additional allowances for money given as wedding presents.”
Gifting could help family members to kickstart a savings habit, perhaps by putting money into an Isa that could be relied upon in emergencies.
While gifting can be a tax-efficient way to support loved ones, by gifting money directly you won’t have control over how the money is spent. Watson says: “If you’d prefer to have some say over the money and how it is used, you could consider putting the money into a trust for your loved ones instead.”
3. Review your investments
People may need to adjust the amount of investment risk they are taking on in their 50s and 60s. Watson explains: “For many in their 50s, their pension may have been invested in a ‘lifestyle fund’. This used to be a popular choice as the fund would automatically reduce its risk exposure as you grew older to try and ensure you retired with a decent sized pot with which to purchase a guaranteed level of income in retirement, often called a lifetime annuity.
“However, the introduction of pension freedoms has given greater flexibility to pension saving, meaning more flexible strategies are now available, which may be more appropriate.”
4. Don’t forget about yourself
Emma Hammond, financial planner at Charles Stanley, says: “If you are thinking about looking after your loved ones financially, the important thing to remember is to not forget about yourself in the process. Remember that once you’ve made a financial gift, it’s permanent – you won’t be able to change your mind.
Happy 100th birthday #pensions tax relief. Born this day in the Finance Act 1921. Here’s to the next 100?? 🎂 pic.twitter.com/c5Lfcbk523
— Alistair McQueen (@HelloMcQueen) August 4, 2021
“Gifting too much also means that you could lose a sense of financial security in later life; it’s best to have a buffer in case you need to factor in for unforeseen future expenses, such as care costs.
“Speaking with a financial adviser can help you to assess how much you have for your own retirement, and therefore how much you can afford to give away to your nearest and dearest.”
5. Pass on good money habits
Hammond describes learning the basics of money management as “one of the most valuable financial gifts of all”.
“Gifting money creates an opportunity to teach good money habits at the same time,” she says. “For younger generations, having a lump sum land in their bank accounts can feel as though they’ve won the lottery, but if they aren’t prudent about handling money, it may not last as long as intended.”
The Press Association
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