Bank of Mum and Dad: The ripple effect of gifting to the next generation this Christmas

The “Bank of Mum and Dad” has become a vital financial resource for younger generations in helping them achieve major life milestones. According to the Finder Wealth Building Report 2024, 34% of Australian parents have bought investments on behalf of their offspring, with approximately a third of these gifts given in lieu of presents during special occasions such as Christmas. While financial support from parents and broader family members (e.g., grandparents) is increasingly commonplace, using superannuation is less so. Gifting to the next generation in this way is not just an act of generosity with potential tax benefits for recipients, but an investment in their future.

Immediate benefit, lasting impact

While superannuation is predominantly viewed as a tool for long-term retirement savings, a concessional contribution can also deliver immediate financial relief.

Typically, concessional contributions are those that are paid by employers via the superannuation guarantee or salary sacrifice arrangements. These contributions provide tax savings for the recipient while also boosting their retirement nest egg. The same outcome can be achieved via a concessional contribution into superannuation from one’s bank account.

Eliza works as an office administrator and earns $110,000 per annum, which includes a mandated employer superannuation contribution of $11,345. Eliza receives a gift from her grandparents of $20,000 and contributes up to her annual limit of $30,000 (i.e., a contribution of $18,655). This act reduces her personal tax, which may result in a tax refund of close to $6,000 while increasing her superannuation savings. For gifting family members, this tax benefit can provide a meaningful difference to recipients in funding regular cost-of-living expenses.

A gift that grows

Superannuation is a powerful tool for long-term wealth building, thanks to its favourable tax structure. The tax paid on investment earnings is at most 15%, which is lower than tax rates outside of superannuation, which can reach as high as 47% (including the Medicare levy). A gift that allows your offspring the opportunity to leverage their superannuation over the long-term has the potential to meaningfully improve their financial position.

The gift provided by Eliza’s grandparents not only provides a tax benefit, but it can also continue to grow tax-effectively, such that the benefit to Eliza by the time she retires could be seven times the initial gift, at $142,000. Upon retirement, Eliza may also be eligible to withdraw these funds from superannuation tax-free (see here for further details).

Eliza’s investment outcomes are shown below. To help investors visualise their own potential investment trajectory, we have created a compound interest calculator, which can be accessed here.

Source: E&P 

Please note, the above graph is for illustrative purposes only and does not constitute advice. The actual outcome will vary based on market movements, fees, tax paid, and your relevant personal circumstances. The 7% return used in this example is not applicable to all investment returns. Individual performance may also differ due to timing of entry or investment size of holdings.

Leaving a legacy

While providing financial assistance is a generous act, it can have unintended impacts on your financial position, security, and retirement plans. For this reason, it is important to consider your own needs and how these may change over time (e.g., rising living costs, aged care needs etc.). For those receiving government benefits, there are also restrictions on gifting that should be considered.

Importantly, financial assistance does not always require a monetary transaction. For many families, assistance may involve:

1. Education: Passing on lessons learned, and resources used is an effective way of instilling healthy budgeting, investing, and financial goal-setting habits. We encourage clients to bring their broader families to meetings with their advisers to help facilitate this.
2. Integrated strategies: There are a range of financial planning strategies that can be used to help build and protect intergenerational wealth (e.g., a withdrawal and recontribution strategy).
3. Inheritance management: Discussing inheritance plans openly helps prevent future conflicts, aligns expectations, and allows beneficiaries to understand the rationale behind financial decisions.

Overview

The gift of a superannuation contribution offers the dual benefit of providing immediate support to children through tax savings while also encouraging disciplined wealth accumulation. Whether your assistance is financial or intangible, there are various ways to support your beneficiaries. An Evans and Partners financial adviser can help outline the considerations for you while also illustrating the benefits for your loved ones.