Three or four years ago, it seemed like someone amongst our group of friends was getting married every weekend. I thought my liver would never recover.
But now, we’ve swapped weddings for children’s birthday parties. Pints for Peppa Pig. We are at that stage of life.
Welcoming a new addition to the family is undoubtedly a joyous occasion, but it is also one of those points in life where things become very real. Such inflexion points tend to bring a host of new responsibilities, along with additional financial considerations.
The below isn’t an exhaustive list of what to think about, and it’s not meant to be. It is simply a list of the main topics that tend to come up when chatting through such matters with new parents - sprinkled with, hopefully, a dash of common sense.
It can be an overwhelming time, new parents tend to have their hands full! As such I have tried to roughly order the below in terms of priority.
Build A Budget
Children are expensive. Your monthly outgoings are going to look a lot different from now on, and therefore it is worth trying to spend some time thinking about what new costs are going to be introduced into your life.
Budgeting isn’t the most glamorous of jobs, I’m aware of that, but if you can it's one to try and tick off before the baby arrives. The numbers don’t need to be exactly spot on - having some plan, however imperfect, is better than nothing.
Not only will going through this budgeting exercise make nasty surprises down the line less likely, but it will also give you an idea of how much of a financial liability your little one may prove to be in the future. Which is important for job number two.
Tip: When you are calculating the total cost of your new arrival, don’t forget to include expected irregular future capital expenses (e.g. education costs) as well as regular, ongoing expenses.
Review Your Insurance
The vast majority of new parents will need to fund their child’s needs through future earnings and income. If those future earnings do not materialise due to ill health, or even death, then that money will have to come from somewhere. This is the point of insurance.
Such topics don’t make for great dinner party conversation - but it is really important to think about how your family would get by if you weren’t around. 1 in 29 children lose a parent before they grow up.
Calculating how much life insurance you require doesn’t need to be too difficult. If you have a rough idea of how much your child is going to cost up until the point that they are financially independent, you have a starting point in terms of thinking about how much insurance you might need. And you can always add further cover to pay off any liabilities that you have, usually the mortgage.
There are lots of different options when it comes to life insurance - the simplest option is level term assurance which pays out a tax free lump sum should you pass away within the time specified under the policy.
Decreasing term assurance, which is typically used to protect a repayment mortgage by matching the reducing outstanding balance over time, is another option. As is family income benefit, which instead of a lump sum pays out a tax free income to your family on death.
You can also choose to include critical illness cover which will pay out if you are diagnosed with a serious medical condition that is specified within the terms of the contract.
Tip: If you have life cover, check with your provider to see whether the policy is written in trust or not. If your life insurance policy isn’t written into trust, not only will your executors need to wait until probate is granted before they get access to the pay-out, but any funds paid out will also fall within your estate for the calculation of inheritance tax - which could mean a 40% haircut for your beneficiaries.
Top Up Your Emergency Fund
It is always good financial practice to have three months’ expenses set aside in cash savings for a “rainy day”. As we have established, children can be pricey and as new parents you can naturally expect your outgoings to increase. So it can make sense to divert any excess income towards beefing up your cash savings for a couple of months.
Remember - the number one way that you can provide for your child’s financial security is by ensuring that yours is handled first.
Check Entitlement to State Benefits
Swot up on what support is available to you as a new parent. The list is long, but there is a good tool on the page I have just linked to above which allows you to check what government sponsored freebies you can qualify for.
As a starter for ten, you have the statutory right to be paid a certain amount while you are on leave from work to have children, provided that you have worked for your employer for a minimum of six months.
The statutory minimum maternity pay entitlement is 90% of your average weekly earnings (before tax) for the first 6 weeks, and then £172.48 or 90% of your average weekly earnings (whichever is lower) for the next 33 weeks.
The statutory minimum paternity pay is £172.48, or 90% of your average weekly earnings (whichever is lower), paid for two weeks.
These are minimums, your employer may well be more generous. It is important to check in advance what you are entitled to at your particular company, because any loss of earnings will obviously have an impact on your budget in those first few months.
You can claim child benefit payments until the 31st August following your child’s 16th birthday, or until the 31st August following their 20th birthday if they remain in full-time education until then. The government will pay £24 a week to support you with your first child, and an additional £15.90 for each child thereafter.
At the moment, child benefit is only paid to families where both parents earn less than £50,000. Where one parent earns between £50,000 and £60,000, benefit payments are reclaimed through the tax self-assessment process by the levy of a High Income Child Benefit Tax charge. If one parent earns more than £60,000, the whole annual child benefit payment will be claimed back by HMRC.
Tip: By claiming child benefit for a child under 12, even if you are going to have to pay it back, you will receive national insurance credits which count towards your state pension entitlement - so it is often worth doing.
Once your youngster is a little older, there is also support available to help meet the cost of childcare.
In England, parents of 2 year olds may be able to access 15 hours per week (for 38 weeks of the year only, sneaky…) free childcare with registered providers. Parents of 3 to 4 year olds may be able to get 30 hours a week, again for 38 weeks of the year only. If you are over 23, both partners must earn at least £8,668 a year - and less than £100,000 to qualify.
These schemes cover the cost of the childcare only, and you may be expected to contribute to additional costs for meals or nappies. But any support is better than none I guess.
There are a raft of changes expected in this area in the next couple of years, and childcare support is slated to become more generous. But given the political landscape, who honestly knows.
Tip: If you earn more than £50,000 or £100,000, the (current) respective thresholds for child benefit and childcare support, you can make pension contributions or charitable donations to reduce your taxable income below these threshold levels to re-qualify for entitlement.
Maximise Tax Free Allowances
Children are broadly taxed in exactly the same way as adults, and they have personal income tax and savings allowances. Any gifts from grandparents, uncles or aunts can be put into a savings account for your child and you can be comfortable that any return on that money is likely to be tax free, unless said relative is very generous.
However, if in a given tax year interest above £100 is generated on money gifted from a parent to their child, then all of the interest is taxed at the relevant parent’s marginal rate of income tax. Therefore, if you as a parent want to start a savings pot for your children, then Junior ISAs (JISAs) may be the best option.
JISAs work in almost exactly the same way as regular ISAs. Any return generated on the funds within a JISA is tax free, and both Cash and Stocks & Shares JISAs are available. Annual contributions to a Junior ISA are limited to £9,000 however.
The primary downside is that as soon as the money is added to the JISA, it is legally your child’s money. And at age 18 they can do with it what they wish…
Personally, I tend to think that the fear of Little Johnny taking his JISA money and legging it to Ibiza is overblown. What better way to demonstrate the magic of compounding returns to your child than showing them just how hard their money can work for them if they make good choices?
But maybe that’s the opinion of a man without kids. It is definitely a risk to be aware of. Assuming they don’t blow it, at 18 the Junior ISA converts to a full ISA and the funds remain within the tax free wrapper.
Parents can also make pension contributions for their children as soon as they are born, but as they won’t have any earnings you will be limited to paying £2,880 (£3,600 gross) a year into their pension.
And unless you as parents are maximising your available pension allowances, I would urge you against prioritising your children’s pensions. Particularly if you are a higher or additional rate taxpayer. There is no point in leaving higher rate tax relief or better on the table, in order to receive only basic tax relief on a pension contribution for a child.
If inheritance tax is a concern for grandparents, then there are a number of ways for money to be gifted efficiently to grandchildren. Each year every UK taxpayer is able to gift £3,000 to anyone without inheritance tax consequence. And for those who haven’t done this previously, they are able to “carry forward” the previous year’s allowance - i.e. in "year one” they can gift £6,000 rather than £3,000.
Where grandparents also struggle to spend whatever income they receive in retirement, rather than let these assets accrue they are able to make regular gifts out of net of tax income and these gifts will immediately fall outside of their estate for the purpose of calculating inheritance tax.
Such gifts must be regular in nature, and must not detrimentally affect the standard of living of the donor. Gifting can be a really technical area, and so if you are unsure it is important to get professional advice.
Tip: When it comes to gifting, record keeping is critically important. Unsurprisingly, the government are quite keen to maximise the inheritance tax take - and so anyone making gifts should keep a careful record, and provide a copy of these records to executors and/or their solicitor.
Any new parents out there (I know that there are a few!) - drop a note into the comments with any money saving tips or questions you might have.
Please remember that none of the above is intended to be advice to any specific individual. If you have questions regarding your individual position, please contact a regulated financial adviser.
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