What's the best way to help your adult child financially?

For many young adults, the path to financial independence looks tougher than it did for previous generations. The graduate jobs market is challenging, rents gobble up a large share of income, and many 20-somethings leave university carrying tens of thousands of pounds of student debt.

Against that backdrop, it's no surprise that many parents and grandparents want to provide financial support where they can. But if you have a lump sum available, what's the best way to use it? Should you help with a house deposit, boost retirement savings, pay down student debt or invest for the future?

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To explore the question, we modelled five different ways a parent could use £20,000 to support a 21-year-old graduate who is not currently in education, employment or training (NEET).

While our example focuses on a young adult who is temporarily out of work, many of the same principles apply to children who are employed. Whether your child is struggling to find work or already building their career, the core question remains the same: how can you use your money to create the greatest long-term benefit for them?

The scenario

A parent has £20,000 set aside to help their 21-year-old NEET child. We modelled five different options they could consider.

• Option 1: give the child the full £20,000 to invest in an ISA
• Option 2: give the child the £20,000 for a house deposit. The money sits in cash until age 30, when they have a good enough salary and additional savings to purchase a property.
• Option 3: use the £20,000 to pay down the child’s student loan
• Option 4: gradually pay the £20,000 into a Self-Invested Personal Pension (SIPP) for the child
• Option 5: Use the £20,000 to fund further study or qualifications that could help the child find work

We assumed real after-inflation annual returns of:

• 5% for global equities (including fees)
• 2% for house prices
• 0.5% for cash 

A range of other assumptions were made, including house price and salary growth. Actual outcomes will differ and should not be viewed as forecasts.

All figures are shown in today's money, meaning they have been adjusted for inflation.

Option 1: invest in an ISA

The parent gives the money to their child to invest in their ISA, and they leave the money untouched until the child turns 60. By that time, the £20,000 gift could be worth just over £134,000 - a substantial sum that would go a long way in helping to fund their retirement. 
The key advantage of the ISA is flexibility. Unlike a pension, the money remains accessible and can be withdrawn at any time without tax penalties. That means the child could use the funds to help buy a home, start a business or simply provide financial security while looking for work.

Although, of course, withdrawing the money earlier would mean the child would benefit from fewer years of potential investment growth.

Option 2: help them onto the property ladder

The parent gives the child £20,000 at age 21 to put towards a house deposit. The child doesn’t yet have a salary to get a mortgage, so they leave the money in cash, earning a real return of 0.5% a year, until age 30 when they are ready to buy a home.

By that point, their parent’s gift has grown to around £20,900 - which is used as part of the deposit.

Assuming house prices grow by an average of 2% a year after inflation, that deposit amount could be worth around £38,000 in housing equity by the time the child is 60.

This calculation only tracks the growth of the original deposit. In reality, home ownership could prove much more valuable because the deposit would enable the child to buy a property using a mortgage. The resulting leverage means any house price growth would apply to the entire property rather than just the deposit.

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Option 3: pay down their student loan

We assume the child has £53,000 outstanding on their student loan (the average amount upon graduation in England).¹

The parent immediately pays off £20,000, leaving £33,000 to repay. The child remains out of work until age 24. In that time, we assume interest accrues at 3% per year, meaning their outstanding loan balance grows to around £36,060.

The child then gets a job at age 24 paying them £40,000 per year with annual wage growth of 2.5%. Even with an above average salary and £20,000 already paid off, the child is unlikely to clear their student loan before the debt is wiped 40 years after they were first due to repay.

In that case, the parent’s gift would have done very little to help the child financially, as it may simply have reduced the amount of debt that would ultimately have been written off anyway.

However, it would be a different matter if the child became a higher earner. If they went on to earn £50,000, rising by 2.5% per year, from age 24, they are likely to repay their student loan before it is wiped. In this instance, the parent’s gift could well save the child around £50,000 in interest.²

The benefit (or not) of the student loan option will be highly dependent on how much the child goes on to earn - something which is unlikely to be clear at age 21 while they are out of work.

Option 4: pay into a pension

Paying into a pension for someone else is a great way to help them with one of life’s big challenges: saving for retirement. As the parent of a NEET, it enables you to at least partially compensate your child for the time they spend out of work, not benefitting from contributions to a workplace pension.

Investments benefit from time to grow - so missed contributions in those early years of your career can really compound.

If someone has no earnings, the maximum you can contribute to a pension for them is £2,880 per tax year. The government then tops this up via tax relief to £3,600. It would therefore take seven years for the parent to fully invest their £20,000 into a pension for their child.

Assuming real returns of 5% per year, those contributions to the child’s pension pot could grow to approximately £152,000 in today’s money by the time they turn 60.

This is almost £20,000 more than they’d have had if the money was put into an ISA, despite the fact the pension contributions are invested more slowly and so have less time to benefit from market growth. This is because retirement savings benefit from the boost of government tax relief, whereas the ISA does not - although the latter does come with more flexibility over accessing the funds.

If the child got a job during those seven years and ended up being a higher earner, the benefit would be even greater. Contributions to a pension when someone has no earnings only get basic rate tax relief (20%). Whereas, if the child became a higher earner, contributions to their pension could attract tax relief of 40%.

What’s more, once the child is earning, the £2,880 limit no longer applies. They can generally contribute up to 100% of relevant earnings (subject to the annual allowance) to their pension. So, a child who becomes employed during those seven years could potentially get the £20,000 into the pension much faster than our model assumes, making the SIPP option even more attractive.

As the child is not initially working and therefore has no workplace pension, the parent will need to set up a Self-Invested Personal Pension (SIPP).

While the pension produced a high projected value in our model, that does not automatically make it the best choice for every family.

Option 5: fund further study

During difficult economic periods, it’s not uncommon for recent graduates to turn to further study - hoping to increase their job prospects while waiting for the employment market to improve.

However, research on the benefits of doing so is inconclusive. A major study by the Institute for Fiscal Studies (IFS) in 2020 found that, once differences between students were controlled for, having a master’s degree only increased women’s earnings by age 35 by 2% on average compared with someone who only had an undergraduate degree. For men, having a master’s actually decreased their earnings power by 2%.

PhDs meanwhile gave women an average earnings uplift of 8% by age 35, while for men they decreased their earnings prospects by 9%.

There were, of course, big variations by subject. Law, business and economics gave some of the biggest uplifts at master’s level, while for PhDs psychology scored well.

For ease, let’s assume they do further study in an area specifically chosen to improve their employment prospects; it boosts their lifetime earnings by 5%; and they find a job by age 24.

We assume their salary if they’d only had an undergraduate degree would have been £50,000. Earning an average real salary of £50,000 from age 24 to 60 could give them total pre-tax earnings of £1.8m with no further study.

Now let’s apply the 5% uplift from the postgraduate study. That would give them a salary of £52,500 a year and earnings to age 60 of £1.89m before tax.

*Excludes mortgage leverage.

The total pre-tax benefit of the further study would therefore be around £90,000. However, after tax, National Insurance and student loan repayments, the child might only receive around half of that. A very rough estimate might put the benefit to them at £45,000 by age 60.

We have made many assumptions here and the actual impact of further study could be very different. A lot will depend on what they choose to study and their subsequent career trajectory.

Conclusion

Looking just at the money side of things, the pension option produces the highest financial value by age 60 under our assumptions. But it also locks the money away for decades. Parents who prioritise helping their child become financially independent sooner may prefer an ISA, housing support or further study despite the potentially lower long-term financial return.

What’s more, there are many variables at play and changing some of those assumptions could result in very different outcomes. Focusing solely on the financial side overlooks other important factors, such as the enjoyment or intellectual benefit the child might gain from further study or whether it enables them to follow a much more fulfilling career path.
Ultimately, it is up to the parent to decide what they believe is the “best” outcome for the child. Is it financial security in later life? Is it the relief of knowing they’ll have a roof over their heads? Or is it the freedom to enjoy this money earlier on - perhaps even while the parent is still alive to see that?

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• Read: What is a Stocks and Shares ISA? The basics
• Read: What could £10k mean to your child?
• Read: Not sure how to invest? Start here

Sources: 

¹ Student loan statistics - House of Commons Library
 ² Should you pay off your student loan early?

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in a SIPP or ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a SIPP will not normally be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment.  If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.