How can we help our daughter pay her increased mortgage without hurting our pension?

My wife and I have about £200,000 in pension and we own our house outright. I have recently retired and my wife is self-employed and still works part-time earning around £2,000 a month.

My daughter and her husband have a fixed rate mortgage which is expected to increase by around £400 a month when they re-mortgage over the summer.

We want to help them pay for it, but we’re not sure what the best way is. What is the most efficient way to help them without depleting our pension pot?

Fran Ivens on This Is Money replies: Mortgage rates shot up in October last year, largely because of the chaos caused by the markets’ reaction to then-Prime Minister Liz Truss’s unsecured tax cuts.

More than 1.4 million people will have to re-mortgage this year at much higher interest rates as fixed-rate mortgages that were stuck during periods of historically low interest rates come to an end.

Nearly six in 10 deals (57 percent) due for renewal in 2023 currently have a rate of less than 2 percent, according to statistics from the Office for National Statistics. Your daughter is therefore not alone in facing a significant increase in costs, but that does not make it any easier.

It’s no doubt generous in helping her cover the cost of the raise, but you need to make sure you do so in a way that doesn’t hurt your retirement and makes the most of your tax breaks.

I’ve talked to some wealth planners to find out what your options might be – as well as the pitfalls to watch out for.

Mike Stimpson, a partner at Saltus, said: With interest rates rising over the past year, those with a fixed rate expiring may see a significant impact on their household finances. It is understandable that you want to limit this financial strain on your daughter.

“Before I think about how I can help them, I’d like to consider what you’ll need when you retire. For this you need to think carefully about your guaranteed incomes and expenses (all of them!) and whether there will be a shortfall that should be covered by pensions.

“Also look out for how this may change, so don’t just think about the situation now, but 10, 20 and possibly 30 years from now, including possible healthcare costs in the future. Once you have a clear picture of your needs, both now and in the future, you need to take into account the lifespan of your pension pots to cover any shortfalls.’

Is it a long-term solution to a short-term problem?

Rosie Hooper, Chartered Financial Adviser at Quilter, said: ‘While the £200,000 you have saved for retirement sounds like a lot, it will only be enough for you and your wife assuming a retirement period of around 20 years and the state pension on top of that.

‘The increased monthly costs of your daughter’s mortgage are not indefinite, but your pension provision is finite. Some fixed rate mortgages are now around 4 percent, and as inflation is likely to come down in the coming months, we should hopefully see interest rates fall along with it, driving rates down further.

So you have to be careful not to damage your own retirement prospects in an attempt to solve a passing problem.

“There are other ways you can help your daughter that require time rather than money. These include childcare and helping with other jobs that are currently being outsourced, which will eventually help her save money as well. It may also be worth looking into ways she can maximize her own income.’

Then using your tax-free gift tax can offer a solution

Stimpson also suggests using your annual gift allowance can help. You may gift up to £3,000 a year with no inheritance tax implications, or donate from your regular income if it is affordable.

He said: ‘When considering gifts of any size, be it one-off or regular, it is always important to consider your needs first to ensure they are covered.

Therefore, this may not be a suitable route if you are concerned about depleting your pension funds. Especially with a larger gift, increasing your pension can have consequences for income tax and inheritance, about which you should seek advice.’

Another option Stimpson suggests is to take out a loan for your daughter instead of gifting the money.

He said: “Instead of gifting, you might consider lending money to your daughter to pay back part of the mortgage at a rate that is better than the market rate to mitigate the financial impact, with fixed arrears.” resolve interest and repayment dates.

‘While this is fairly easy to set up and can ensure that you don’t completely exhaust your pension funds in the long run, it does have some drawbacks. First, it would have to be declared to the mortgage company as an outgoing loan when they re-mortgage, which can affect mortgage affordability calculations.

“Second, as with a gift, putting your pension money into a loan can have significant tax implications.”

Be careful not to lose your pension rights

Hooper emphasizes that since your wife is self-employed and works part-time, assuming you’re both in your early to mid-sixties, she may want to continue working for another 10 years, depending on the type of work she does.

If this is the case, it’s critical that she doesn’t collapse her retirement, as this triggers the so-called money purchase annual allowance.

Under current legislation, each person accessing their pension flexibly activates the supplement, with the effect of reducing their annual supplement from £40,000 to £4,000, limiting their ability to save for a pension while still receive tax relief.

Elaine Harrison, a senior financial planner in St. James’s Place’s retail client division, said: “As an alternative, or in addition to gifting income, you might consider moving to a home equity release, known as a lifetime mortgage. This provides a method of releasing capital from the value of your home and it is only repayable after your debt – essentially your estate becomes liable for the debt.

“There are different types of schedules available, which may or may not suit your needs. Equity release is a specialist area of ​​advice and is not suitable for everyone and you should seek financial advice before proceeding with this option.

“However, it’s important to remember that the equity in your home should be viewed as your trump card and you shouldn’t play it too early in retirement.”