Talking to your parents about money

Older does mean wiser in so many ways, but even our parents might benefit from a friendly chat about their finances as they approach their later years. Here are a few money matters that could be worth talking through.

Traditionally, it’s our parents who have guided us about money until we’ve grown up and are making our own decisions. Then it’s usually a case of parents taking a back seat. But it can be easy for people approaching retirement – or those who have already retired – to take it a little too easy when it comes to finances in later life. That’s where you could help by raising awareness of things to consider (if they haven’t already).

It could be a quick chat about whether they’ve made their will, thought about long-term care options or have life insurance. Have they made plans for their estate (and are they aware of potential inheritance tax liabilities), and do they understand why it’s likely a good idea to pay off any debts? You could also broach saving and investing and how the cost-of-living crisis and later retirement ages could impact their finances.

Saving and investing

Your parents might have an ISA or two or a regular savings account. Inflation can eat away at the value of cash savings over time. That means that when your parents want to withdraw their savings, their money might not have the same spending power as it did when they first put it away.

Here's an example: if your parents have £2,000 in savings and the bank offers a 1% interest rate, they would get £20 in interest after the first year. However, if the inflation rate is 6%, the value of their initial deposit would have reduced in real terms by £120 during this time, leaving them £100 worse off.

Investing could be a better option. With a stocks and shares ISA, compound growth over time could make a big difference to its value and bring better returns in the long run. However, as with all investing, your capital is at risk – the value of your investment can go down as well as up and you may get back less than you invested.

Pensions

If your parents are over 55, they could start drawing from their pension – taking up to 25% as a tax-free lump sum and leaving the rest invested. Partial drawdown gives some control over when they want a regular income, but the chances are that your parents will still be working at 55 and are not ready to dip into their pension pot just yet. There’s also the risk that they could start running out of money too early into their retirement.

That’s why it’s important to let them know that the value of their pension fund can increase or decrease depending on the circumstances and where it's invested. Getting some help from a financial adviser is worth considering when thinking about pension drawdown.

Inheritance tax

It always pays to be as tax efficient as possible, but it can be hard to figure things out on your own. The rules and regulations around inheritance tax (IHT) can be particularly complicated. It’s another area where expert help could benefit your parents if they’re planning to pass on their assets to children or grandchildren. The good news is there can be ways to reduce a large IHT bill too, whether it’s through gifting or charitable donations.

Identity theft

Your parents have worked hard to build their retirement nest egg, which unfortunately makes them prime targets for scammers ready to take advantage. Let your parents know what to look out for, like how to stay safe online, or spot suspicious calls, texts and letters.

Talking about money with your parents can help both sides, and you may learn something from each other. You’ll be giving something back for their efforts in helping you over the years, and hopefully they’ll gain some insight and pause for thought about the future and how to make the most of their money.

Disclaimer: As with all investing, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. A stocks and shares ISA or personal pension may not be right for everyone. Tax treatment depends on your individual circumstances and may be subject to change in the future. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, investment, tax or legal advice. If you are unsure if an ISA or personal pension is the right choice for you, please seek independent financial advice.

The Hub is intended as a knowledge portal to provide information on a range of topics, including financial products and lifestyle management. These articles are not financial advice. Articles may reference products and services which Chase UK does not currently offer.