Should I still be giving my adult children money?

It dishes out £17bn a year, doesn’t carry out any credit checks and rarely charges interest. Welcome to the Bank of Mum and Dad. Are you running a branch? 

A study in 2022 found three-quarters of people think buying a home is harder for young adults than other generations, so it’s hardly surprising parents would rather help than watch their offspring struggle. 

Whether you’re helping your kids get on the property ladder, footing their wedding bill or any other life costs, running the Bank of Mum and Dad can give you a warm glow and – in certain situations – be advantageous to the family as a whole.   

The danger can come if you feel pressure to give – this could leave you short in retirement and create a dependence on you that means your adult kids never learn key budgeting or account management skills. 

So, how do you help them out financially without affecting their ability to handle their own money? The good news is it’s never too late to start discussing the knowledge and skills they need to be more independent with money. 

Is the Bank of Mum and Dad ever a good idea? 

While bailing out your kids every time they WhatsApp you for a tenner will only create a reliance on your parental generosity, helping them get on the property ladder or avoid a tax bill in later life is another matter. 

Chartered Financial Planner Tamsin Caine, from Smart Financial, says: “There’s something to be said for [not] waiting to pass your legacy on after your death.  

“If you think you have enough money for the rest of your life, you can give your kids a leg-up when they most need it.” 

Children are much more likely to need a cash injection when they first leave home and start work than they will when they inherit after you’ve passed away. 

“In reality, they’d benefit most in the early stages of their career when they want to get on the property ladder, not if you pass away when you’re 100 and your kids are in their 70s,” she says. 

But while nobody wants to see their kids struggle financially, Lisa Conway-Hughes, Chartered Financial Adviser from LCH Wealth, stresses parents must put their needs first. 

“Don’t give away money if you can’t afford to,” she says. “The biggest gift you can give your children is peace of mind that you’re financially stable, especially when it comes to those later years when you’re thinking about costs such as care.” 

The advantages of passing on money 

There are a few reasons that giving money within your lifetime will have benefits – both for you and your children. 

With more adults than ever living with their parents in 2021 due to the cost of buying a house, the warm glow of seeing your children in their first home (and potentially getting your spare room back) is one obvious reason to help them with a deposit.  

Equally, if you're worried about your family facing an Inheritance Tax (IHT) bill when you pass away, giving children money while you’re still alive could also reduce any potential liabilities. 

Firstly, consider whether your family is liable to face a bill in the future. While tax laws could look quite different in years to come, currently IHT is charged at a rate of up to 40% on estates worth more than £325,000. 

However, there’s an extra allowance of up to £175,000 if you’re passing on your family home to children or grandchildren. This means a married couple can effectively pass on up to £1m before IHT will be payable. 

If you still think you’ll breach that threshold, gifting money to your children could be a smart move if done properly – if you're worried about IHT it makes sense to speak to a regulated financial planner that specialises in estate planning. 

“You can gift £3,000 a year without worrying about Inheritance Tax, but if you want to give substantial amounts above that you need to live seven years to be exempt,” says Caine. 

“Keep accurate records of any gifts and preferably store them with your will so your executors can find the documents if you need them.” 

• Could your loved ones be at risk of a surprise Inheritance Tax bill? 

Communicate or contribute? 

Whether you’ve helped with a deposit or not, if your child is moving out then the realities of financial management might come as something of a shock. 

The transition between children having all their bills sorted, where ‘board’ has been paid to parents, to having to set a budget and needing to look after everything shouldn’t be underestimated. 

It can be hard to not to want to give children a little financial support to help them navigate this period; however, conversations that will help them set their financial direction are equally as important. 

“Ideally, you teach your kids habits as soon as possible. Help them to have a system in place,” says Conway-Hughes. 

“I’d encourage the ‘pay yourself first’ mentality, so the day they get paid is the day they do all their money organising and separating out the money they need for bills. 

“One thing young people need to decide between is short-term fun and a medium-term goal of getting on the property ladder,” she adds.  

“So, they might want to move in with friends in the right part of town, but they could sacrifice that...so they can get on the property ladder sooner? 

• Should I ask my grown-up children to pay rent? 

“With all financial decisions, encourage them to take a step back, make a plan and decide what they want to achieve and what’s most important to them.” 

In particular, if your children are leaving for university, helping them understand their finances can reduce the amount of money being requested from you.  

Those at uni are at risk from the feast-or-famine mentality if their student loan is paid three times a year. 

They’ll receive the money at the start of each term but may need to pay their rent and other bills monthly, which could be a recipe for accounts running dry if they’re not used to budgeting. 

Caine advises making use of some bank accounts’ smart features and creating categories, or ‘pots’, to help budget: “Once they’ve got their big pot of student loan in, then they create a pot for their monthly rent.  

“If they want to save for a holiday, that goes into a different pot. Some accounts round up your spending and put it in a savings pot so you get into that habit.  

“It’s today’s equivalent of the old envelope system people used to have.” 

Finally… a word on pensions 

We know that paying into a pension is essential, whether we’re reaping the rewards of a substantial pot or making do with what we have - so, the best thing we can do for our kids is encourage them to start saving too. 

Analysis from Nest Pensions shows that when you start saving makes the most difference. If your child saved £200 a month for 10 years – a total of £24,000 - and started at 22, at 60 they’d have £125,000, assuming 5% growth each year. 

However, if they saved £200 a month for 10 years from the age of 32 – still putting in £24,000 at 5% returns - they’d only have £77,000 at 60, such is the effect of compound growth with savings.  

So, it makes sense to help them start earlier (and, obviously, continuing to pay in for longer than 10 years will keep increasing that growth). 

“For most people leaving university, pensions are the last thing on their mind,” says Conway-Hughes. “But encouraging them to start paying into one from their first payday will transform their financial wellbeing in retirement.”  

Once your kids reach 22 and are earning more than £10,000 on a contract, their employer must automatically enrol them into a pension scheme, which they will contribute to.   

"Being automatically enrolled into pensions gives us the habit of saving into a pension early, but don’t forget that it doesn’t guarantee the retirement you want – you may have to pay in more," says Conway-Hughes. 

With minimum contributions starting off quite low, it’s a good idea to encourage them to pay in as much as they can afford, sharing your experiences if it helps, to give their saving the best start.