Parents forgo own pension savings to pay for grown up children
The average parent is forgoing a pension pot of £38,500 in order to financially support each child who is 18 and over, according to research from Standard Life. The research finds that parents are supporting their children post 18 for expenses such as university costs, debts, weddings, house deposits and other general finances.
On average, parents estimate they will invest around £15,490 in each adult child. If this sum was invested into a pension instead, it could provide a pension pot of £38,500 in 20 years year's time for a basic rate tax payer. And for a higher rate tax payer, it could provide a pension pot of £51,380.
This means a higher rate tax payer with two children could be forgoing over £100,000 from their pension pot. One in three (30%) parents admits they are currently forfeiting long term financial planning for the sake of their children, while almost the same number (31%) have made sacrifices in the past.
Standard Life's John Lawson commented: "A parent's desire to provide for their children even when they become young adults is increasingly coming at a huge cost to their own future financial security. Our research highlights the significant financial challenges facing parents, whether to secure their long term future or meet their family's immediate needs. The high level of unemployment among young people can only be exacerbating the problem. There's no doubt that many more adult children will be relying on their parents for support which must be a real worry for many parents. Some may even be returning to the nest as they are made redundant or fail to find work.
"Parents have no choice - they have to spend carefully and make sure that whatever money they are able to save for their future is working as hard as it can for them. That means being efficient with their savings and making the most of tax breaks offered by ISAs and pension contributions. To help we've created yourfuturemoney.co.uk which includes free guidance, hints and tips on tax efficient financial planning for everyone."
Top three tax tips
1. Grab whatever opportunities you can to make pension contributions. Remember, with pension plans, the government contributes whenever you do, by rebating the income tax on your contributions. And if you're in a workplace scheme, your employer is likely to be topping up your contributions too. So try to increase your regular pensions savings as and when you can; or pay in a lump sum after a windfall such as a bonus.
2. Use as much of your £10,680 ISA allowance as possible before the end of the tax year. ISAs are a great way to build up a cash lump sum prior to retirement, which can help to pay for your child's wedding or fund university fees. You can invest up to half of this in a Cash ISA which can be earmarked as an emergency fund to help you and your children with more immediate concerns. Then consider leaving the rest in equity funds so you have the chance of greater tax efficient growth over the longer term.
3. Check to see if you can save on tax by you and your spouse taking a team approach to your Personal Allowance. The amount you can earn tax-free each year is currently £7,475 a person. If you shift assets to the one of you with the lower income, you could pay income tax or capital gains at a lower rate. Think about the whole family and remember that children have tax-free allowances too and Junior ISAs are now available.