The benefits and pitfalls of being the Bank of Mum and Dad

It makes sense when you think about it. Many parents are taking the view that it's best to help their children get a start early in life, and watch them enjoy it. It makes more sense than expecting the children to wait till their parents pass away in 30 years' time, just as the children are reaching retirement age.

There is another view, of course, and it's equally valid. This is that the kids should not be deprived of the opportunity to struggle and reach goals in their own right as their parents probably did. I can see the logic in that, but if you are 60 now, and your children are 30, you probably bought your house around 1987, when the average home in Brisbane cost $62,000 - 2.6 times the average wage of $23,600. Today, the average home costs around eight times average earnings. So there is no doubt that buying a home today is much more difficult for a young couple than it was 30 years ago.

I have long been of the "help sooner rather than later" view on one proviso - it must be a hand up not a hand out. The children must be responsible financial managers before any funds are handed over, which means making sure they are not tied down by credit card debt or personal loans.

But this begs the question - if you hand over a lump sum is it going to be a gift or a loan? Once again, it depends on the circumstances. Apart from wanting to help their children, a thought that often occupies the parents' minds is what will happen if the children have a relationship breakdown. If the money is handed over as a gift, might your child's partner walk out the door with half of the money you've given them?

My wife and I have long believed that "a gift given is a gift given" and money given to children should be on a non-recourse basis. As far as we are concerned, the grief that would be caused all round by a divorce would be so horrendous that fighting about ways to claw back financial assistance that may have been given years ago is a bridge too far.

There is no "one size fits all" strategy here, but if you do intend to make a loan it should be documented. A simple agreement which includes clauses such as that the loan is repayable on demand and specifically in the event the recipients separate; and that the loan is interest-free, or interest-bearing at a certain rate, is the minimum that should be specified. Options that should also be considered are securing the loan, i.e. registering a mortgage, and/or making it a condition of the loan that the recipients enter into a binding financial agreement that will bind a Family Court if things get nasty down the track.

While divorce is the common risk to consider, it may also be worthwhile having the document if any of the recipients of your generosity are in the type of employment where their assets could be up for grabs if they were to be sued. Depending on the size of the loan, you may be well advised to take legal advice.

Be especially careful if you intend to apply for the age pension when you reach pensionable age. Assets given away five years or more before application for the pension cease to exist for Centrelink purposes. By making a gift instead of a loan, you may substantially boost the age pension you would be eligible for.

I have spoken to Centrelink three times regarding the supposed increase in the work bonus, but apparently there is no increase for me. How does $300 a fortnight suddenly add up to $11,800 in a year as recently reported on A Current Affair and on the Services Australia news page? I am told by one person at Centrelink that there is only an additional $4000 starting balance for new pensioners, not for me as I use my $300 work bonus fortnightly. Just wondering if someone could explain to me how it is actually calculated, who can actually claim more than $300 a fortnight (which it has been for years) and if it will apply to people in my situation in the future?

John Perri of AMP Technical explains that the work bonus of $300 a fortnight has not increased. Instead, the unused amount of that bonus which can be accumulated, also referred to as the 'work bank', which previously was a maximum of $7800, has now increased to $11,800. In addition, new age-pensioners after January 1, 2024 will automatically have a work bank of $4000. This does not apply to you as you have been in receipt of the age pension prior to 1 January 2024. As you have used up your $300 a fortnight work bonus, I suspect you do not have any amount in your work bank, so this recent change does not assist you.

I live in a retirement village and my wife has been moved into aged care. Her income has been assessed at $39,000 a year and her assets have been assessed at $163,000. We have been advised that the fees for the home are a basic daily fee of $60.86 and accommodation contribution $60.55. I think it's unfair that she is expected to pay almost $45,000 a year on an income of $39,000. Would appreciate your comments.

Aged Care Guru Rachel Lane explains that it is a common misunderstanding that because aged care is means-tested it will be affordable. As a member of a couple your wife will be assessed based on half of your combined assets and income, your home in the retirement village is exempt from the assessment. People who receive the full age pension and have assets below $58,500 have their accommodation cost met by the government. Once your wife's share of income exceeds $31,707 a year or her assets exceed $58,500 (or both) she will start paying a contribution towards her cost of accommodation and care. In your case, your wife is a low means resident, the assets above $58,500 are having an accommodation contribution charged at 17.5 per cent and the income above $31,707 is having an accommodation charged at 50c in the dollar. Some simple strategies such as gifting within the allowed limits, pre-paying your funeral expenses or purchasing a funeral bond and making sure you are using the second-hand value of your personal assets could substantially reduce this cost. Seeking advice about purchasing an income stream with an asset test exemption could also be beneficial.

For example, if your wife's assessable assets were to reduce by $50,000 the daily accommodation contribution would reduce by $8750 a year.

. We have some spare funds that we would like to put aside for our three grandchildren who are ages 5, 3 and 1 to be accessed by them at age 21 or so. Would an index fund be suitable?

Insurance bonds are the perfect investment to build up funds for children and grandchildren because nothing has to be declared on anybody's tax return each year as the earnings accrue as bonuses. Furthermore, at any stage the bond can be transferred to the child free of capital gains tax. A good example is Generation Life's ChildBuilder insurance bond which can be a great way to create wealth for children for a specific purpose.