The bank of mum and dad: How to help adult children without harming your future finances

Having kids is expensive – and never more so than when they get older and parents’ primary role seems to morph from giving love and care to being head of the bank of mum and dad.

Because while the financial outlay for younger children tends to centre around smaller expenses like entertainment, pocket money and birthday party presents, older kids tend to want money for much bigger things, including their first car, university fees and expenses, help with getting on the property ladder, and weddings.

“The bank of mum and dad forms a crucial means of financial support for younger generations,” points out Craig Rickman, personal finance editor at the investment platform interactive investor.

“While any loving parent will naturally to want to give their child a leg-up in life, many face a delicate balancing act, being careful not to jeopardise their own financial future in the process.”

And Louise Hill, founder of GoHenry, the prepaid debit card and financial education app for young people, says: “The bank of mum and dad is a familiar part of family life, with many parents helping their children through some of their biggest milestones. Parents naturally want to give their kids the best possible start and support them where they can.”

However, she points out that 2023 research by GoHenry suggested more than half of parents (52%) planned to reduce how much they loaned or gifted to adult children, and the majority of young people said they didn’t expect support for big life events like buying a house or paying for a wedding.

“While it’s natural for parents to want to step in financially, true long-term security for kids comes from being equipped with the right financial knowledge,” says Hill. “When kids understand how money works, they build independence that lasts a lifetime.

“But at the same time, supporting your kids shouldn’t come at the expense of your own financial wellbeing. Protecting your retirement, maintaining emergency savings, and planning for later life isn’t selfish – it’s responsible.”

She stresses that modelling good financial habits is one of the most valuable lessons parents can pass on, adding: “It’s not about closing the bank of mum and dad, but helping it become a launchpad for financial confidence.”

Here are simple steps that can help support older children financially while maintaining your own financial goals…

1. Clarify your own financial goals

Understanding where you are in relation to your own financial goals gives you a better chance of working out whether any gift or loan to your kids is affordable both now and in the future, says Rickman.

“Knowing where you stand enables you to make an informed decision,” he explains. “For instance, you may decide you’re happy to continue working longer than anticipated if it means taking a massive bite out of your child’s university debt or helping them to buy a home.”

2. Invest for your child’s future early

Starting saving as soon as you can means you have more time for money to grow. Rickman points out that saving £100 a month from the day your child is born would grow to almost £35,000 by the time they reach age 18 (assuming 5% annual growth net of fees).

“In contrast, if you waited until your child is 10 years old, you’d have to commit £300 a month – three times as much – to accrue to the same sum,” he says.

3. Consider the stock market

If you have some time before your child needs money, Rickman suggests parents consider investing in the stock market rather than saving.

“While the eventual sum isn’t guaranteed and the money can move up and down in value, history tells us that over long periods investing gives you a better chance than cash savings of growing your wealth – or in this case your kid’s wealth,” he says.

4. Invest in a Junior Stocks and Shares ISA

Hill says one way to make financial support from the bank of mum and dad work harder is to consider investing in a Junior Stocks and Shares ISA. “Contributing to an account like this can allow your kids’ investments to grow over time, [it] teaches them about investing, and helps them see the value of long-term planning,” she advises.

“But remember, with investing your money can go down as well as up, so it’s always wise to only invest what works for your family’s budget.”

5. Get the whole family involved

The key to intergenerational wealth planning, which sits at the heart of the bank of mum and dad, is to use the family’s finances in the most effective way, stresses Rickman.

“It could be that your parents have surplus cash or assets and perhaps have an inheritance tax problem and would be more than happy to support their grandchildren to meet key financial goals while they’re alive, instead of passing on the money on death,” he says.

6. Set clear expectations about financial help

If you plan to contribute toward larger expenses in the future, Hill says transparency is key. “Be clear about what you can realistically offer and where you expect your kids to contribute themselves,” she advises.

7. Consider whether to loan or gift outright

In an ideal world, parents have sufficient money to give their children a financial head-start without compromising their own financial goals, but this isn’t the reality for many parents, who risk leaving themselves short in retirement by making outright gifts, warns Rickman.

He says one way around this is to loan the money instead.

“While it might be an uncomfortable thing to do,” he says, “it’s important to set clear terms of repayment, ideally drafted as part of a legal agreement, helping to avoid any friction or misunderstanding down the line.”

8. Understand the tax position with gifts

Knowing the tax rules before gifting is key to making sure you or your loved ones don’t get tripped up down the line, explains Rickman.

“This includes grasping the inheritance tax gifting rules and understanding how capital gains tax works, should you wish to pass on an asset such as a second home,” he says.

“If you plan to raid pension assets to support your children, learn about the possible tax implications here too, as well as appreciating the impact any withdrawal might have on your future lifestyle in retirement.”