A cautionary tale.
Pete and Sue were thrilled when their son Josh announced that he and his partner Jenna had found their dream home.
They were all so caught up in the excitement that when Josh asked if they could help them with a deposit they readily agreed.
Josh and Jenna needed $98,000, and having recently retired, Pete and Sue withdrew the lump sum from their pension fund. It was a large amount, and of course they were a bit anxious, but Josh was so happy that we pushed our doubts aside.
They expected that reducing their investment capital would impact its earning capacity, but they really hadn’t considered the long-term impact that would have on how long their income may continue, and how sharply it would increase the likelihood we would outlive our retirement savings. Josh and Jenna bought the home, moved in and everything was great for a couple of years. Sadly, the relationship broke down.
When the house was sold and the mortgage paid out, there was money left over. Pete and Sue naturally assumed that our capital would be returned, but Josh and Jenna simply split the proceeds between them and went their separate ways.
When Pete and Sue asked Josh about their money, Josh became defensive and claimed it had been a gift.
They tried discussing it, but emotions ran high. The ensuing argument created such a rift that Pete and Sue had no contact with their son for nearly three years.
Pete and Sue’s retirement plans were thrown into disarray and their family was torn apart by a terrible misunderstanding. Yet, there were steps they could have taken to avoid it all.
We could have:
- Sought financial advice. Had they consulted a financial advisor, they would have better understood the impact such a withdrawal would have had on their retirement strategy.
- Consulted a solicitor and had a formal loan agreement drawn up. The agreement could have included a lien clause outlining that the property was collateral for the loan enabling them to claim the property or its proceeds if the loan was not repaid.
If Pete and Sue had, in fact, gifted the money, they could have set conditions through a legal document stating that the gift would be returned in full, or part, if the relationship ended.
Gifting money, however, may have tax implications, and potential complications if the gift is disputed and the matter goes to a family court. Gifting money may also impact the age pension.
Pete and Sue knew they couldn’t turn back the clock, so they were proactive in engaging a financial adviser to review their retirement portfolio and recommend adjustments that maximise the earning capacity of their savings.
Their adviser also helped prepare a budget so they could enjoy a reasonable lifestyle on reduced income.
All this grief could have been avoided if Pete and Sue had simply sought professional advice and had a formal agreement drafted right from the beginning.
Before you blindly jump in as the Bank of Mum and Dad for your family, call us to check what should be considered before you put your retirement plans in jeopardy. Proper planning could help deliver a win for all the family.
The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.
