From cash gifts to loans and funeral plans, we cover the ways your savings can be used to benefit those around you.
Published - 21 Feb 2024
Disclaimer
This article is for general guidance only and is not financial or professional advice. Any links are for your own information, and do not constitute any form of recommendation by Saga. You should not solely rely on information in this article to make any decisions, and always talk to a qualified professional or service for your own particular situation - but once you've read it, you'll be in a much better position to have those discussions with the professionals. All information in this article is correct at the time of publishing, but laws, entitlements, tax treatments and allowances may change in the future.
Many households are feeling the pressure of high mortgages and childcare costs, along with the general rising cost of living. According to research from wealth management firm Saltus, 88% of its clients said their adult children and grandchildren had delayed making major decisions and purchases such as buying a home, starting a family or retiring.
It’s hardly surprising then that it found almost four in five grandparents, with a large amount of savings or investments, are stepping in to provide financial support to their adult grandchildren, while 70% are still helping adult children.
There are several ways you can use your cash to help loved ones, whether that’s helping them get on the property ladder, lending them some money to help through a tricky spot or smoothing the process of organising your funeral when you pass away.
But before you make any major financial decisions yourself, it may be worth speaking to a financial adviser or solicitor first to ensure there aren’t any unintended consequences.
Before anything else, put yourself first
As eager as you might be to help younger members of your family, the most important thing is to ensure you won’t be jeopardising your own financial wellbeing. That means having enough money in the bank to cover any emergencies or major changes to your own situation.
Most financial advisers recommend that you always have between three-to-six months’ expenses in an easy-access savings account.
Even if you’re fit and healthy now, it’s also important to consider that you might need to pay for your own care further down the line.
Only once you are confident that you are financially secure should you start thinking about helping others.
1. Cash gifts
Each year we give around £14bn to friends and family, according to the Institute for Fiscal Studies (IFS). The money is often used to help loved ones buy their own homes, fund home renovations or to celebrate a marriage.
However, if you are intending to help with a house deposit, do note that you’ll need to sign a declaration confirming you don’t expect the money to be paid back. The conveyancer that’s acting on the buyer’s behalf can help you draft the necessary letter.
Another reason why people give money away is for inheritance tax planning. If you live for a further seven years after making the gift, the money does not count as part of your estate for inheritance tax (IHT) purposes. (This is based on the IHT rules for the tax year 2023/24, but could always change in the future).
Making a lump sum payment gets money out of your estate and starts the seven-year countdown as soon as possible.
However, note that everyone can give away up to £3,000 each year without having to worry about IHT – either to one person or split between different people. You can also gift £5,000 to children (or £2,500 for grandchildren) tax free when they get married.
2. Regular gifting
Another option is to make smaller, regular gifts. The benefit of a regular gift is that the payments can be stopped if circumstances change.
These can be used if you want to help your child with their rent or mortgage, for example, or make monthly payments into a grandchild’s savings account.
Giving regular gifts to loved ones doesn’t only help them, it can also be an effective way of reducing a potential IHT bill.
All regular gifts from surplus income will be considered as tax free, however you need to be able to prove to HMRC that you could afford to make the payments without it affecting your standard of living.
Your income can include earnings, rental payments as well as money from a pension or annuity. You can also use interest or earnings from savings or investment income – the key is that you don't raid your capital.
The contribution must follow a regular pattern of payment, and you will need to keep details of the gift along with comprehensive records of your income and outgoings.
3. Set up a trust
If you want to have a little control over what the money you give away is used for, you may want to consider using a trust.
With a discretionary trust, the trustees manage the money on the recipient’s behalf but are able to make decisions about how and when they get the money.
People often use trusts if they are worried the recipient might get divorced or have problems managing the money.
Alternatively, if you simply want to ensure that grandchildren do not get money until they are 18 (or 16 in Scotland) you could use a bare trust, which is generally simpler than a discretionary trust.
“Any income tax or capital gains due on investments held in a bare trust are payable by the minor beneficiaries,” says Ian Dyall, an Estate Planning Specialist at Evelyn Partners.
“But as they are unlikely to have much other income or gains they will often be covered by their personal allowance for income tax (currently £12,570) or their annual CGT exemption (currently £3,000). So, investments are likely to grow largely tax-free.”
To set up a trust you will need to speak to a qualified professional to help you understand the benefits and risks of this setup, as well as guiding you through the process.
4. Provide a loan
Lending money to children, or other family members, means you can help them out but still get your money back at some point. However, it’s an agreement that needs to be approached with caution.
“Unfortunately, disagreements with family and friends are common. Insisting on regular repayments to reduce the loan over time may often be preferable to a fixed term loan or simply repayment on demand,” says Christopher Eddison-Cogan, Partner at Gannons Solicitors.
If you are planning on lending a larger sum of money, it makes sense to consider using a signed loan agreement. This will allow you to lay out the terms clearly, including the repayment structure and timeframe. You may want to talk to a solicitor to protect yourself and to ensure you are acting as a responsible lender.
If you are charging interest on the loan, the payments must be declared to HMRC and will count towards your taxable income.
Also be aware that if you’re loaning money for a house deposit, some lenders could be unwilling to approve a mortgage application, instead insisting that the deposit needs to come from savings or a gift.
Some may accept it, but the loan repayments will be then considered in mortgage affordability calculations, reducing the amount they can borrow.
A mortgage broker can recommend the lenders that can help best in this scenario.
5. Help with a mortgage (in other ways)
If you want to provide help with a house deposit without giving your money away, there are various specialist mortgages you could consider.
One option is a guarantor or ‘springboard’ mortgage, where you commit to repaying the loan if the borrower defaults.
For a guarantor mortgage, you’re offering your own home or savings as security against the loan. This may be useful for buyers struggling to save the required deposit, or those with a poor credit history. In extreme cases, this could put your home or savings at risk, so consider taking professional advice before making this decision.
With the springboard option, you typically pay 10% to 20% of the property purchase price into a savings account offered by the lender. You may earn interest on the money held in the account, and you can withdraw your cash only after a timeframe specified by the lender – typically five years.
However, you will be required to step into the breach if the family member gets into financial difficulties and cannot make the repayments, meaning you may not get your money back. Your savings will also be inaccessible for a few years, so it’s important you have enough money to keep you going in the meantime.
Another option is a family offset mortgage. Here, you pay a cash lump sum into a savings account - in lieu of a deposit – for a family member who wants to buy a home. The interest you would have made on the savings is sacrificed to reduce the interest on the loan.
However, there aren’t too many of these around, and if the money is withdrawn it can cause mortgage payments to rise, so be sure this is the right option for you.
6. Set up a funeral plan
It’s not the nicest thing to consider, but putting a plan in place now will make it easier for your family when the inevitable happens.
The average cost of a basic funeral is around £4,100, according to figures from the SunLife: Cost of Dying Report 2024. Using your savings to pay for a funeral plan upfront can be the simplest option, allowing you to give your family peace of mind that several of the arrangements are already taken care of.
Do note that even with a comprehensive plan, it won’t cover all your costs (for example, food and drink), and could lead to a hefty bill for your loved ones. So decide if you’d like to leave some additional money to help with these, if you want to minimise the organisation needed after you pass away.
Before you buy any plan, it’s important to give some thought into the type of funeral you'd like and whether the option you are considering will offer good value for money and deliver the peace of mind that you need. Before taking out a funeral plan, look at things like whether you can pay it upfront or will need to spread the payments - make sure you can afford it for the entire time, as any repayments missed could invalidate the agreement.
Key takeaways
There are several ways to help family with savings, but always ensure you’ve planned your own financial future first.
Gifting lump sums or making smaller regular gifts is a great way to easily help others – and can reduce a future inheritance tax bill.
Helping friends and family with loans is an option, but take care and consider a signed loan agreement.
Gifting money isn’t the only way to help younger generations on to the property ladder – you can use your wealth as a security for their application. Talk to a broker to find out more.
Consider pre-paying some of your own funeral expenses, to make things a little easier for family when you pass away.
Even if you’ve retired, putting money into stocks and shares can be a more rewarding home for spare cash than a savings account – but there are risks involved too. If you think investing is right for you, we explain how to get started.
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