Many couples nearing retirement find themselves caught in an intergenerational financial squeeze. On one hand, adult children need help with things like university fees, paying off student loans or finding a deposit for a first home. On the other hand, elderly parents in the later stages of retirement need help to cover living costs and care, whether at home or in assisted living.

It’s like a perfect storm. Just as the accelerator needs to go on retirement savings, there are suddenly family demands for financial support from both ends. The big question is, what is the right balance between these competing needs? Is it OK to raid the retirement savings to help family members, and what are the consequences of doing that?

Helping the younger ones get ahead

Let’s start with the younger generation. Every parent wants to support their children and give them the best start in life. Going off to university is one of those milestone moments when parents feel obliged to lend a hand. Under the Student Loan Scheme, students can borrow money for course fees, other course-related costs and living costs. The loan is interest-free and repaid from future earnings through the tax system. Interest is payable if you go overseas for more than six months. 

Many parents worry about their children starting their working life already carrying a significant debt burden, which can lead them to provide financial help to reduce their children’s borrowing. But is this sensible?

There are several aspects to this. Firstly, the loan is interest-free so long as the student stays in New Zealand. From a strictly financial point of view, parents are better off leaving their money invested where it will earn a return, rather than paying off a debt that has no interest.

From the student’s perspective, lenders view student loans differently from other debt. It’s repaid through the tax system, so, in effect, once working, students pay a higher tax rate until the debt is paid off.

Helping the kids buy a house

When taking out a mortgage, student loan repayments slightly reduce net pay, which may lower the amount that can be borrowed. This is because banks limit the percentage of net pay that can go toward mortgage repayments.

From a financial perspective, parents are best off keeping their money invested until their children want to buy a house. It is still difficult, although not impossible, for young couples to buy a house without financial support from parents. But is it a good idea?

Helping your adult children get on the property ladder will have a much greater impact on their financial futures than leaving them an inheritance at the end of your life. The sooner they can buy a house, the cheaper it will be and the sooner they can pay off their mortgage.

An added benefit is that you get to see the impact of your gift to your children, something you can’t do if you leave an inheritance. One catch, though: gifting money to children in a relationship may mean your gift is treated as relationship property if the relationship ends. It’s best to obtain legal advice on how to protect this gift.