The Bank of Mum and Dad: How much can you afford to give away?

Supporting your children financially has become part of being a parent.

A first home deposit. A car. A wedding. A helping hand during university. A safety net when life gets bumpy and income falls a long way short of outgoings.

But before giving money to your children, it is important to understand what you can genuinely afford without compromising your own financial future.

For many families in the UK, parental financial support can play an important role in helping children achieve life goals such as buying a home.

However, unlike regulated lenders, family members are unlikely to have formal lending criteria, risk assessments or compliance oversight to help guide their decisions.

Which is why, as the manager of your own personal lending organisation, you sometimes have to stop and think: Can we actually afford this?

Balancing your children’s needs with your own finances

Obviously, when it’s our children, emotions take over. Pride and care and wanting them to have an easier start than we did, might mean we think with our heart rather than our financial head.

But compromising your future with your generosity may not be a wise strategy. It would be much easier to achieve your aims if you know what you can afford to give. But how can you assess what you may need later in life and the extent to which your finances will be able to support those needs?

Your future deserves more than guesswork. To understand what’s genuinely affordable, you need a clear view of your retirement income, your spending needs and your long-term lifestyle plans. You may have to factor in your current pension, your savings and investments, and allow for potential care costs.

This is where cashflow modelling can help.

What is cashflow modelling?

Cashflow modelling takes a detailed approach to your finances. It starts with your current figures and projects them forward, year by year. It can help illustrate how your financial position might evolve over time and enable you to explore important questions, such as:

• If we give £20,000, what happens to our retirement income?
• If we help with a deposit, will we still be able to travel, upgrade the house or enjoy life?
• If we gift regularly, will our money still last into our 80s and 90s?
• If markets dip, do we remain financially secure?
• If care costs arise later, will we be prepared?

It’s not about restricting generosity. It’s about protecting your future while helping your children build theirs.

Often, the results are surprisingly reassuring. When they’re not, you can see the changes you may need to make to prepare for your own future.

How cashflow modelling helps you make decisions

Cashflow modelling can help you understand how a significant gift might affect your long-term financial position by illustrating potential outcomes using your own financial information and assumptions.

It can help you assess the affordability of different options over time.

For example, it could indicate that making a £50,000 gift immediately could place pressure on your future finances, whereas a smaller gift of say £10,000 followed by additional support in the future, may be more affordable.

You’ll understand whether your emergency fund, investments and pension remain strong enough to support you through life’s surprises. You can also see whether your pension plans are on track or whether you need to put more money into building your own future before you can think about helping your children.

You would also need to consider how giving money to your children may impact your inheritance tax planning.

Ways to give money to your children

Once you understand what’s affordable, you can choose the most appropriate way to help:

• One-off gifts: Perfect for deposits, weddings or big milestones, as long as they fit comfortably within your long-term plan.
• Regular support: Monthly contributions to help with rent or childcare might be manageable when mapped against your future income.
• Gifting from surplus income: This could be ideal for parents whose retirement income exceeds their spending needs and may also provide inheritance tax benefits when the relevant conditions are met.
• Gifting later in life: Some parents discover they can give more at 70 than at 55 without having any impact on their lifestyle.

The most suitable approach depends entirely on your personal cashflow picture.

Is it time to arrange your cashflow modelling?

If you’re thinking about helping your children, whether with a deposit, a gift or ongoing support, it’s worth taking a pause to understand what’s genuinely affordable. Giving money to your children does not have to mean compromising your own financial security.

At Continuum, we can help you see your potential future through sophisticated cashflow modelling, test different gifting scenarios and build a plan that helps protect your retirement while empowering your children.

The generosity of the Bank of Mum and Dad should be balanced with the need to protect your own financial wellbeing.

Call us today.

This article is intended for general guidance only and is based on the opinion of Continuum it does not constitute financial advice. Individual circumstances vary, and you should consider seeking advice from a regulated financial adviser before making any financial decisions.

The value of an investment can go down as well as up. When investing Capital is at risk.

Levels and basis of reliefs from taxation are subject to change and their value depends upon your personal circumstances. We recommend seeking professional advice on personal taxation matters.

The Financial Conduct Authority does not regulate taxation and trust advice or Cashflow modelling.