Many parents want to help their adult children financially. The question is how to do it without creating risks for your own retirement. Here are the considerations worth thinking through.
Helping an adult child with a home deposit or through a difficult patch can be deeply important to you. The amount and type of support you can offer will depend on what you need for your own life, now and through retirement.
It can be hard to talk about limits when someone you love needs help. Taking time to understand the financial consequences gives you a clearer basis for that conversation, particularly if you and your partner feel differently about what is affordable.
A useful place to begin is with what you would have left after helping, and whether that would still support the retirement you are planning.
Start with your own retirement needs
Look at your expected living expenses, any debts and the income you expect to receive once work stops. Allow for larger costs such as replacing a car, maintaining your home and changes in your health or care needs. Your savings may already have several jobs to do.
Consider how the proposed support changes that picture. Would you need to work longer, draw more heavily on super or keep less money available for unexpected expenses? If the plan relies on working longer, think about what would happen if health or employment circumstances changed.
Ongoing help deserves the same attention as a large transfer. For example, $500 a month amounts to $6,000 a year, or $18,000 over three years. This simple illustration shows why agreeing on an amount and a review date can be useful when covering living costs.
Be clear about whether the money is a gift or a loan
If you intend to give money with no expectation of repayment, plan on it being permanently unavailable for your own spending. Make that intention clear to everyone involved.
If you expect repayment, discuss when it should happen, whether interest applies and what happens if your child cannot pay. Get independent legal advice and document the arrangement before transferring money. Legal Aid NSW highlights the importance of a written agreement to help avoid disputes about whether family support was a gift or a loan.
Documentation cannot ensure the money will be repaid on time. Consider whether your retirement could cope with a delay or with the loan not being repaid. Depending on repayments for essential bills leaves you exposed if your child's circumstances change.
Understand what a guarantee could require of you
A guarantee may help your child obtain a home loan without you handing over cash immediately. It creates a financial obligation for you if they cannot meet the loan terms.
Depending on the agreement, you could have to repay some or all of the debt, plus interest and other costs. If you use your home as security and cannot pay, it could be sold to meet the obligation. Even a guarantee limited to part of a loan can put the asset used as security at risk.
Before signing, ask exactly how much you could owe, what security is required and how the guarantee can end. Have your own solicitor explain the documents and consider the effect on your retirement finances. A future release should not be assumed simply because your child expects the property to increase in value.
Check how Centrelink will treat the arrangement
Giving money away does not necessarily remove it from the Age Pension assessment. The gifting free areas are $10,000 in one financial year and $30,000 over five financial years, with no more than $10,000 counted within the free area in any single financial year. These limits apply to a single person or a couple combined, not to each member of a couple separately.
You can give more, but amounts above the applicable free areas generally remain assessable as assets for five years from the gift date. Deeming also applies, meaning assumed income from that amount is included in the income test. These are pension assessment thresholds, not a legal limit on your generosity.
Earlier gifts can matter too. Services Australia can assess gifts made in the previous five years, so check the position even if you are not yet receiving the Age Pension.
A family loan is generally an assessable financial asset, with deeming applying even if you charge no interest. Forgiving the debt later may bring the gifting rules into play. Check the treatment of your proposed arrangement with Services Australia or your adviser before committing.
Set expectations while the conversation is calm
Agree on what the support is intended to achieve and whether it is a single contribution or something that may continue. If there is a limit to what you can provide, explain it before anyone makes plans around the money.
If you have more than one child, consider how you want to approach fairness. Equal amounts may be your preference, or different circumstances may lead you to offer different kinds of help. Discuss any intended effect on inheritances with your solicitor so that your arrangements and estate planning are considered together.
You may find that a smaller contribution, support for a defined period or practical help is more manageable. There is room to discuss alternatives before agreeing to an amount.
Questions to ask before committing
- What would we have left for our own retirement and unexpected needs?
- Are we giving, lending or guaranteeing, and does everyone understand that?
- Could we manage if repayments stopped or a guarantee was called on?
- Have we checked the pension consequences and obtained any legal advice needed?
- Have we agreed on the amount, duration and how we will review ongoing help?
At Wealth Optix, we take time to understand your family priorities alongside your own financial needs. If you are considering helping an adult child, a conversation with Marissa can help you explore what that support could mean for your retirement plans.
Request a conversation with Marissa
General information
This article provides general information only and does not take into account your personal objectives, financial situation or needs. Consider your circumstances and seek appropriate financial, tax or legal advice before acting. The example is hypothetical. Government payment rules and the terms of individual agreements should be checked before making a decision.
Wealth Optix Pty Ltd is a Corporate Authorised Representative (No. 001321543) and Marissa de Saint Quentin is an Authorised Representative (No. 001003145) of Spark Advisors Australia Pty Ltd ABN 34 122 486 935 AFSL 380552.