How you help can impact your own financial future. Help too soon and you may feel short financially now. Help later and you’re leaving a longer time for prices to rise on the homes your loved one may want to buy.
Savings – cash ISA or otherwise
If you’re lucky enough to have been saving for a while you may just already have the lump sum you want to provide.
If your funds are in a cash ISA (Individual Savings Account) though, just remember any money that you withdraw will lose its tax-free status.
If your loved one is still a few years away from buying their own place, you’ve still got time to open a cash ISA in your name and pay into it regularly or subscribe to an existing ISA that you hold. Any money paid into an ISA must belong to the account owner. Taking advantage of tax-free saving over several years should get you into a good position to help. You can also look at a regular savings account which can pay a higher rate of interest if you put in a certain amount of money each month.
If you have investments you could look to draw on them to provide a lump sum. If you sell investments that aren’t in a stocks and shares ISA, you may incur a capital gains tax liability on them. Any money that you withdraw from a stocks and shares ISA will lose its tax-efficient status.
If you haven’t considered investing before, now may be a good time to read more about it and see if investing could be right for you. With any investment your capital could go up or down, meaning you could get less back than you originally invested. Investments should be held for the medium to long-term (5+ years).
Withdrawing from your pension early
You can take out up to 25% of your pension pot tax-free from the age of 55. While most personal pensions set a specific age when you can start taking money from your pot, it's not normally before 55.
Please get in touch with your pension provider if you're not sure when to take your pension. There may be tax implications of removing money from your pension early.
For more information, please contact an independent tax adviser or HMRC directly.
Some of the things to consider:
- What’s left in your pension pot might not grow enough to give you the income you need to last you into old age.
- 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.
- 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 is 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.
Learn how pensions work with the government’s pages