When you retire and receive a portion of your pension as a lump sum you may be tempted to use this to help your children buy their first home or to educate your grandchildren. The reality is that only about 6% of South Africans will be able to retire comfortably and of that, maybe only half would be in a position to give money away.
Once you sit down with a financial advisor you will realise fairly quickly that you will need every cent of that lump sum to fund your retirement.
The home loan
One agreement that parents may enter is to invest a portion of their pension into the child’s home and receive an income from it. This can work for both parties because of the ability to arbitrage the difference between the lending and borrowing rates. For example, you may only receive 6,5% if you put the money in the bank yet your child would be paying about 10% to the bank. If your child repays you at 9%, you are getting a better return and they are paying less interest.
Before you go this route, decide what you would do if your child was unable to meet the monthly repayments — would you really be prepared to kick him or her out of their home? Also only consider this if your child would normally qualify for the loan from the bank. If the bank turns them down due to affordability then that increases the risk that they will not be able to repay you.
You are also required to declare this income to the Receiver of Revenue. It may be tempting to omit this agreement to the Receiver but it is likely they will figure it out and you would have broken the law.
Donations
If you are one of the few South Africans who could actually afford to give your children money, you need to take donations tax into account. Each individual can donate R100Â 000 a year tax free. If you are married, together you could donate R200Â 000 a year to your children. If they need a larger lump sum urgently you could arrange a loan which you write off each year in line with the donations tax threshold. However, it is best to get tax advice first and to structure your will so that your children are not liable to repay the loan if you die before you have had the time to write off the loan.
The bottom line however is that it probably makes financial sense to say, “I love you and I wish I could help you, but I just can’t afford to”.
Visit Smart Money for more news, blogs, tips and Q&As. Post questions on the site for independent and researched information.