Can you afford to be more generous in retirement?

Those who plan to retire within 12 months expect to give more than £4,000 per year to relatives, according to Prudential.

While being generous gives you that warm, fuzzy feeling and helps loved ones to get more out of life, it is not always the most sensible thing to do.

Ultimately, before making the first step toward giving financial gifts, you need to make yourself a priority.

Put your own finances first

Take stock of your own financial situation before committing to giving your money away to others. Can you afford to make these gifts? Even if it will not affect your position immediately, will you face financial instability later in life, due to making these gifts, especially if your living costs increase due to needing care or accommodation?

To begin, you will need to understand your current financial situation. This will include:

  • How much you have available
  • The income needed to support the lifestyle you want to have
  • How long you will need the money to last
  • How much you will need to have in reserves for emergencies and cost in later life

Once you know this information, you can begin to work out whether you have any spare money which could be handed to loved ones as a gift or living inheritance.

Deciding how to give gifts

You may choose to give money as a lump sum. This is the most common choice for those helping them to make larger, or one-off purchases, such as the deposit on a home, or buying a car, for example.

If the money is to be used to help with living costs, such as bills and mortgage payments, it is probably better to make regular, monthly gifts instead of a larger one-off payment. According to the Prudential’s research, 27% of monthly gifts are used for this purpose.

Only you will know which the best way is for you.

Giving money efficiently

While giving money away to family or good causes will undoubtedly help the recipient. By reducing the value of your estate, these gifts can also help reduce the amount of Inheritance tax (IHT) potentially payable when you die. For example, the annual exemptions mean that you can give up to £3,000 per year away to an individual, and it will immediately be outside of your estate for IHT purposes.

You can also make tax-efficient wedding gifts in amounts of up to:

  • £5,000 for children
  • £2,500 for grandchildren
  • £1,000 for any other relation

Furthermore, regular gifts from income may be immediately exempt from IHT, if you can prove that:

  • You intend to make regular payments on a long-term basis
  • Those gifts are taken from your normal income
  • Your normal lifestyle is not affected by doing so

Gifts which don’t come under the annual exemptions may be included in your estate and therefore liable for IHT if you die within seven years. Otherwise, IHT is payable on a sliding scale depending how long ago the gift was given.

Getting technical

If you do decide to help family members financially, it is up to you whether you decide to give the money free of stipulations, or if you would like to maintain some control over how it is used. You may even decide that you would like to see the money repaid at a later date.

This is all possible through written agreements. In these you can include;

  • How the money is supposed to be used
  • Repayment terms

The agreements don’t have to be seen by a legal professional, but it might help if you later need to rely on the document to settle disagreements or issues.

How can financial planning help?

Consulting a financial planner before making any large gifts will help to make sure that you are seeing the situation from every angle and have considered all possible outcomes. Using financial forecasting software, we will be able to tell you whether you have enough money to support your desired retirement lifestyle, and if you have enough spare cash to help others.

When lending or gifting money to relatives, your financial planner will be able to guide you through the process and put plans in place which will protect both you and the recipient in case future problems arise.

To speak to a financial planner about giving financial gifts and planning how your retirement income can be used to support you and others, please get in touch with us on 01664 77 88 99.