Seven questions about giving money away in retirement, answered

Financial News

Research from Prudential has shown that many retirees could be helping with the living costs of up to three generations. But how are they doing it and are there more efficient ways to help loved ones financially, when you leave working life behind?

Let’s break it down…

1. How are other retirees spending their money?

According to the ‘Class of 2018’ study, 31% of those planning to retire in 2018 will continue to give money to loved ones. The average retiree expects to give away a total of £4,300 each year, with women giving around £25 more than men, each month.

The majority (56%) of money given away by those who have left working life behind will go to children or step-children, while a quarter is given to grandchildren. Perhaps surprisingly, this year’s retirees will also be using their money to support older generations, with parents receiving 8% and 2% going to grandparents.

2. Should I be giving money away to loved ones?

It depends. Giving money to loved ones to enhance their quality of life is a personal decision, which will depend on several factors, including your own financial situation, and of course, whether your loved ones need the help.

Don’t assume that what others are doing is the right path for you and your family. It is your choice and needs to be based on facts, rather than a crowd mentality. In fact, if you decide that giving money away now, isn’t the right decision, you may want to read up on the SKI Generation ( that’s Spending Kids Inheritance, for the uninitiated) as you might very well find yourself joining them.

However, if you are still thinking about supporting loved ones with your retirement income, we encourage you to read on.

3. What are the most important factors when giving money away in retirement

It is vital that you make your own circumstances a priority. Your heart may tell you to make sacrifices to support loved ones, but your head might be telling you that that is a bad idea. There is no point giving everything you have, to help loved ones if you are then left in an unsustainable position, financially. To ensure that you are making gifts in a sensible and efficient way, you need to consider:

  • What you can afford
  • How you will give the money away
  • The legal and financial implications

4. How do I know what I can afford to give away?

Hopefully, when you retire, you will already have a plan in place which details your income, desired lifestyle and how you will use any remaining funds. If not, you can find out more about retirement planning here.

If you want to give money away to loved ones, you may need to re-evaluate this plan, considering how much you want to give away and whether it is sustainable in the long run.

The second thing to account for is later-life expenses. Your current budget could change as your lifestyle and needs evolve throughout retirement and you may find that you need more money for health and accommodation costs in your later years.

The third thing to factor in is inflation, and while a reduction of 2-3% per year in the purchasing power of a fixed income might not sound like much now, the compounding effect over a retirement which could last 20-30 years is significant.

5. Is it better to give a lump sum or make regular payments?

That depends on two factors:

  • Whether you have surplus income or capital
  • The requirements of the person receiving the money

If the recipient needs a lump sum, for example to help with the purchase of a new home, then you need to consider the effect on your own finances in the short, medium and long term, of transferring that lump sum to them. For example, if you were to hand over a large amount of capital now, how will it affect your ability to pay for care in 10-20 years’ time?

You should also consider whether the lump sum is a gift or a loan, there are advantages or disadvantages to each.

Making gifts out of income is potentially less risky, as you can stop those gifts at any point however, if the recipient requires a lump sum, potentially smaller, regular amounts will be less helpful.

6. What about tax?

You may be worried about Inheritance Tax (IHT) being payable on the gifts you give to family members. This is a valid concern and can be a heavy factor in the decision making for some.

If your estate is worth less than £325,000 when you die, there will probably be no IHT due. However, if you think that you will breach this threshold, making gifts may help to reduce the tax due on your death.

There are numerous circumstances in which financial gifts are IHT exempt, including wedding gifts, gifts between spouses and gifts which fall within the £3,000 annual gift exemption.

Regular gifts from income can also be free from IHT, if it can be proven that they:

  • Were intended to be regular gifts
  • Were made from your usual income
  • Did not affect your ability to afford your normal lifestyle

Meanwhile, lump sums might be considered to be Potentially Exempt Transfers (PETs). These will incur reduced IHT liability, depending on the length of time you are alive after making the gift. After seven years the gift will no longer incur IHT.

7. What else can I do to make sure I am making effective decisions?

Seek financial advice. An adviser will be able to analyse your current situation from an outsider’s point of view, taking both practical and emotional factors into consideration. You will benefit from suggestions and information which comes from a place of experience and understanding of the nuances of gifting in retirement.

To discuss your options, please get in touch with Sarah or Bev on 0115 933 8433.

The Financial Conduct Authority does not regulate tax planning. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.