How much money do you need to retire?
Taking the step to help a loved one get onto the property ladder is a big commitment for you and them. It’s important that you understand how this decision could impact your standard of living now, in the future and in your retirement especially if you’ll need money in older age for costs of later life care.
The average cost of residential care stood at £32,344 a year in 2018, nearly three quarters of the average house deposit. (Source: Santander First Time Buyer Study 2019.)
Check your state and/or workplace pension and any savings and investments to see how much you’ll have when you retire. You don’t want to over-lend and end up short when you’re no longer working.
Getting this view of your financial future will help you understand how much you could potentially help your loved one with buying their own home.
Look at your savings, investments or other income sources
Trace lost bank accounts, savings or Premium Bonds
Once you’ve been able to get a view of how much money you’ll need to retire and achieve your desired standard of living, you can look at your future plans.
It’s important to think about the immediate impact on any financial commitments you have. If you have any debts, for example, you should consider whether you want to pay them off before helping your loved one.
You’ll want to factor in other plans or big expenses you may have in mind:
- buying a new car every few years
- home improvements.
There are several ways you can help your loved one, including:
- early inheritance
- early drawdown on your pension
- equity release
- savings or investments (if you have £20,000 available to invest you can talk to one of our Santander Financial Planning Managers).
It's best to speak with a financial adviser first to check how these actions could impact you and your future.
Talking to an expert might help you unlock options you may not have considered and help you to decide the best way to help your loved one while protecting your financial future.
An independent financial adviser may also be able to provide advice on how giving money to your family could impact you from an inheritance tax perspective.
Under new rules introduced in April 2015, you can now take your pension pot as cash in one go once you reach 55. The first 25% will be tax-free. The remaining 75% will be added to the rest of your income and taxed normally. Instead of closing the pension, you can withdraw cash from your pension pot. The first 25% will typically be tax-free for each cash withdrawal, but the rest will be added to your other income and is taxable.
Withdrawing from your pension early gives you the option to make large purchases, one of which may be to help your loved one with their home ownership dreams. But there a few things to take into account before making this decision.
- Your pension pot reduces with each cash withdrawal. The earlier you start taking money out of your pot, the greater the risk your money could run out.
- What’s left in your pension pot might not grow enough to give you the income you need to last you into old age.
- If there are administrative charges for each withdrawal they could reduce the size of your pension pot.
- Any money taken out of the pension pot which grows in value may be taxable whereas it grows tax-free inside the pot.
- Once you take money out, you can’t put it back in.
- Taking cash lump sums could reduce your entitlement to benefits now or as you grow older.
Remember, everyone's pension and circumstances will be different. It might help to get independent advice.
Learn how pensions work with the government’s pages
When deciding to help your loved one get onto the property ladder it’s important for you to know how you’re going to help them. You need to consider whether:
- you’re going to be gifting the money
- it will form part of their early inheritance
- you expect it to repaid.
Simply giving a sum of money (whether for a deposit or other parts of buying a home) means there’s no obligation for your loved one to pay you back.
Mortgage providers will often want a letter signed by you confirming that you have no intention of requesting this money back and waive any right to hold equity or legal interest in the house being bought.
It’s important to know though there may be inheritance tax implications in gifting money. Talk to an independent tax adviser or HMRC directly for the full picture.
If you choose to loan the deposit to your loved one, a mortgage provider will want to take the loan repayments into account as part of the mortgage affordability assessment. This would mean that:
- the amount the mortgage provider is prepared to offer is lower or,
- they may refuse to approve the mortgage altogether.
Like gifting, loaning in these circumstances may have tax implications so you’ll want to talk to an independent tax adviser or HMRC directly.
You may decide to provide your loved one with an early inheritance gift to use towards their house deposit. Speaking to an inheritance tax specialist or HMRC should give you all the details for your particular circumstances.
Just remember to take into account how providing an early inheritance might impact your own financial security now and in the future. Once you’ve gifted the money there’s no way to get it back.
When you decide to loan money, agree terms upfront just as a bank would. This will make sure that everyone involved knows what they’re getting into, saving those awkward conversations later on.
You may find it useful to get a loan agreement written up by a legal expert.
Things to consider:
- How will the money be repaid: monthly, yearly or when the property is sold?
- When the loan is to be paid back.
- Will interest be charged? If so, how much?
- What happens if they miss a payment?
- What happens in the event of a separation/divorce?
- If the property is sold before the loan is paid back will the lender receive payment in full from any equity from the property?
Whether you decide to gift, loan or provide an early inheritance to help your loved one(s) with a property, there are inheritance tax implications you should be aware of.
There is a current inheritance tax allowance threshold of £325,000, which is known as Nil Rate Band.
With inheritance tax there are several other considerations which are taken into account when working out how much tax may need to be paid. For example, passing any unused inheritance tax allowance to your spouse when you die, inheriting a house, or giving monetary gifts. You can find out more about inheritance tax and how it may affect you at gov.uk. You may also find it useful to speak to an inheritance tax specialist.
In situations where parents have more than one child or loved one, it can be difficult to decide how much you help each one.
If one has already received more help financially than the other, do you still split any future inheritance equally or do they receive a lower final amount to compensate for the help? What if one is better off financially than the other, do you still want to split an inheritance equally?
These are all difficult questions with no right or wrong answer, but it’s useful to think about them to help you plan what works best for your family.
Having a family conversation as early as possible can help iron out any future issues and help with your planning.
If you haven’t already done so, creating a will may be a good way to clearly distinguish how each loved one is helped. It will also help avoid any arguments or legal challenges about your estate.
We’ve partnered with nudge to provide more information on the importance of making a will and what happens if you don’t.
If your loved one is buying a home with a friend or partner you should confirm if the money is for them and the other person and whether the mortgage will be in single or joint names.
You may want to think about what will happen if they decide to go their separate ways. You may want to speak to a solicitor about arranging a ‘Deed of Trust’, an agreement showing how any equity in the house should be split between the interested parties. You can expect to pay around a few hundred pounds for the solicitor’s time but it may save more in the long term. Rules may differ in Scotland.
We’ve partnered with nudge who have provided more information on taking out a joint loan or mortgage