How to manage the Bank of Mum and Dad

Caring for ageing parents can take many forms, but one strand could well be financial, and you might find yourself taking the reins at the Bank of Mum and Dad one day.

As a child-free adult with only a prima-donna mutt to care for, I’m more at liberty to play a role in my parents’ later-life care compared with my brother, who is now a father, and has responsibilities – and Hey Duggee tunes – coming out of his ears. So, what can people like us do to prepare for the opportunity of helping parents should they need it? And what happens if you inherit the Bank of Mum and Dad one day?

Here are some areas to think about, and suggested groundwork to lay.

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It’s good to talk

If you’re lucky enough to have a good relationship with your parents, you’ll likely be able to discuss money matters in a frank way, and they’ll feel comfortable being transparent about their finances. For the purposes of this article, I’m going to assume that’s the case.

As your parents age, starting a dialogue sooner rather than later can help you build up knowledge of their financial lives, so you can understand where you might be able to help in the future, and what steps you might need to take to do that.

Talking early might also prompt discussions about inheritance tax (IHT). If it’s likely to be relevant for your family, together you could mull options for mitigating the impact of Britain’s “most-hated tax”.

IHT planning isn’t something you can do in haste. For example, one of our recent articles focused on how people can pass on wealth by making regular gifts out of excess income. Gifting money in this way often takes place over several years to ensure beneficiaries avoid incurring a tax bill.

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Power to the people

One thing I would urge everyone to discuss with their parents is lasting power of attorney (LPA). This legal document allows someone, while they have mental capacity, to appoint one or more adults to help them make decisions, or to make decisions on their behalf.

There are two types of LPA: health and welfare, and property and financial affairs. It’s possible to have one type, or both. Having LPA over your parents’ financial affairs could, for example, mean you go on to manage their bank accounts, pay bills, and sell their home.

LPA could be highly valuable if a parent goes on to develop a condition such as dementia. You can also start making decisions while your parent has mental capacity if they grant permission, or if the LPA says that you can.

Setting up an LPA can cost up to £82 per LPA, although some people might be exempt or eligible for a discount. The LPA process is different if you live in Scotland or Northern Ireland, so visit www.gov.uk for further details.

Take stock

One parent may have always taken responsibility for the couple’s investments, private pensions, and household bills.

So, if one of your parents has always been the “money manager”, it makes sense for you to talk to both to compile - and keep updated - a list of assets and where their income is derived from. Such an inventory, which must be stored securely, could make it less stressful if you end up taking charge at the Bank of Mum and Dad one day.

You could ask where any investments, such as self-invested personal pensions (SIPPs) and individual savings accounts (ISAs) are held, plus details of any life cover, for example. Do your parents hold Premium Bonds? Do they have pre-paid funeral plans? Do they have any loans or debts? These are just a few suggestions for things to cover. The discussion might take the form of an “ongoing conversation”, rather than a single session where you pepper them with questions.

As they age, you or your parents might suggest automating the payment of bills, so there’s no risk of falling behind with payments. Digital statements work better than paper ones to prevent identity theft should such documents not be shredded. No one is immune to scams, and you should judge whether it’s worth raising the topic of password complexity and checking that the same one isn’t being used across the board.

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Where there’s a will, there’s a much easier way

Dying without a will, or leaving one that’s out of date, can drive a wedge between relations, especially if someone’s circumstances are complicated and they have been married more than once and there are children from previous relationships.

If your parents die without a will – dying intestate – the law decides who gets what and assets must be shared out according to strict rules.

So, if your parents don’t have a will, urge them to invest in one as soon as they can. A simple will can cost as little as £60, rising to several hundred pounds, according to UK consumer champion Which?. For a more specialist will, the cost is likely to be between £500-£600.

While many people would turn to a solicitor to write a will, it is especially prudent if your family circumstances are complicated, as outlined above, your parents aren’t married or in a civil partnership, if they own property abroad, if they want to set up a trust, or if there is a family member with special needs who needs to be protected after they die.

If you’re an executor of a will, you’ll need to know where a copy of the will is kept.

Inheritance tax

First, a quick IHT refresher. The tax is applied to an “estate”, which means property, money, and possessions. Everyone has an allowance of £325,000 (known as the nil rate band) and anything above that threshold could be subject to tax of 40%.

Whichever parent passes away first, it may be some comfort to you and the surviving partner to know that there is usually no IHT to pay if the estate is valued below £325,000, or if the estate is above the £325,000 threshold but everything is left to a spouse or civil partner. However, if your parents aren’t married or in a civil partnership, they do not enjoy the same IHT exemption.

Children are not entitled to the same IHT exemption as a spouse or civil partner. If your parents own their own home, and leave it to you and any siblings, the tax-free threshold increases to £500,000 if the estate is worth under £2 million. The same applies if the property is left to foster, step or grandchildren.

Pensions

Often, final salary, or defined benefit (DB) pensions, provide a reduced income for a surviving spouse, or dependent children. It’s worth considering whether this reduced income would be enough for a surviving parent to continue living in the same home, or whether they might need to downsize.

With defined contribution (DC) pensions, everything is usually IHT-exempt. If a parent dies before the age of 75, the money in a pension, such as a SIPP, can pass to the surviving spouse or children without any need to pay income tax, and any money inherited is free of IHT. However, if someone dies after the age of 75, any money is subject to income tax based on the tax position of the person inheriting the money.  

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It’s important that parents keep pension expression of wishes forms up to date, so that it’s clear who pension money should pass to. On the interactive investor website, you can set up or review beneficiaries at any time from your ii SIPP account.

State pension

In most cases, state pension payments will stop when a person dies. Sometimes, there are circumstances where a widowed spouse is entitled to a portion of income from a state pension. Visit gov.uk to find out more. Children do not inherit state pensions.

Annuities

If your parents purchased any annuities for retirement, they will have determined at the time whether it could be passed on to a beneficiary, but annuities often stop when the policyholder dies. A joint-life annuity pays an income to a spouse or partner after death, but sometimes at a lower rate. Children do not inherit annuities.

ISAs

The tax-free status on ISAs is preserved if they pass to a spouse or civil partner, and this type of transfer is also IHT free when it passes to a spouse or civil partner. However, if you inherit money held in an ISA from your parents, it is subject to IHT. An exception is eligible AIM shares held in an ISA. These can pass to beneficiaries free of IHT.

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Savings and shares

As well as being subject to IHT, if you inherit money in a cash savings account, you may have to pay income tax on interest you earn after you inherited. If you inherit shares, you may have to pay income tax on dividends paid after you inherit.

You will have to pay capital gains tax (CGT) if you sell shares you inherited that have risen in value since the person died.

Premium Bonds

Premium Bonds are subject to IHT. If you need to claim the savings of someone who has died, you can do it via the NS&I website. You must be legally entitled to claim the savings and the bonds must be cashed in. The money will be paid into a bank account.

If you are unsure if your parents held Premium Bonds, there’s a tracing service for NS&I accounts or investments. But you must be an executor of their will or have power of attorney to use the service.

Long-term care

If you think you might help to physically care for your parents yourself one day, it’s important to keep an eye on your own economic security.

Caring is a role that predominantly falls to women. The latest data from the Office for National Statistics (ONS) reveals that in England “females were statistically significantly more likely to provide unpaid care than males in every age group up to 75 to 79 years”. Caring for parents can have a big impact not only on salaries, but also on eventual pension pot sizes.

Alice Guy, our head of pensions and savings, wrote last year about the burden of care fees, explaining that care homes now cost an average of £61,152 per year, according to ONS data released in 2023. Guy said: “With an ageing population, the cost of care home fees is a growing concern and falls disproportionately on those who sadly have dementia.”

In 2025, new rules will put a cap on care costs. Yet, as Guy observes, “there will be an £86,000 cap on what you end up paying for care costs. But the sting in the tail is that this cap only applies to costs to do with personal care, such as washing and dressing, rather than accommodation costs.”

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Faith Glasgow, the former editor of Money Observer, wrote a great article on “9 things that every spouse of partner must know about care home fees”. This information is equally illuminating for adult children.

It covers topics including what happens if one parent goes into care and the other is still living in their home, the means-testing process, a suggestion for adjusting your will and at what time you should consider it, and a warning on trying to prevent assets from being part of the means-testing exercise.