“Having a baby is a pivotal time in anyone’s life and the process of starting a family can change everything in an instant not least a mother’s finances. A detailed financial plan is an important tool for any mother to not only plan for their child’s financial future but also to mitigate any negative financial impacts that having a child can have on their personal finances. Rightly or wrongly, social norms continue to dictate that women often become the primary care giver when a couple has children. One of the ramifications of this is that women can suffer a ‘motherhood penalty’, which can result in them having less money than their male counterparts. While the following five financial planning points apply to any parent, regardless of gender, they might be particularly pertinent to a mother looking to plan her own finances and those of her family.”
Mind the pension gap when it comes to career breaks
If a mother decides to take a career break to look after her children, she needs to be aware that unless she claims child benefit she could end up missing out on National Insurance credits. Failing to register for NI credits could mean that you don’t qualify for a full state pension, which requires you to have 35 years of NI credits. Similarly, women’s pension savings can end up being smaller than their male counterparts due to a career break, so it is important to start as early as possible and try to continue to contribute to a pension even if they don’t have a regular income. According to our research, men on average are saving almost double what women are each month towards their retirement (£301 vs £171 respectively). It’s also worth noting that there is a growing trend of mothers returning to work after a career break as self-employed and as such are not auto-enrolled into a pension, making it imperative that these women save for retirement in an alternative way.
Consider protecting the value of the primary carer
Career breaks can also make mothers more likely to find themselves without a protection product in place such as life assurance, critical illness or income protection as these products are often included as a workplace benefit. Families often consider protecting the income of the primary earner, without considering the cost of replacing the role of the primary carer which is equally as important. If the primary carer falls ill or passes away, the surviving partner will need to revaluate their working hours or pay for extra support to cope with the increased responsibility. Having protection in place is even more crucial for a single parent whose children are totally dependent on their income. While both points apply equally to both genders, it disproportionately impacts women who typically take on the burden of childcare.
Keep control of funds earmarked for children
UK families are becoming increasingly complex and this can result in it becoming harder to ensure that wealth is passed down to the intended beneficiaries.For example, if a mother has young children and has an inheritance that she would like to specifically earmark for her childrens’ education, it might be worth considering placing the money in trust. Doing this can help to shield the funds from misuse if she were to die or divorce and not be able to make sure that money is used as she originally intended. If she were to die without leaving a will the money would go directly to her husband who might then decide to use the money differently.
Use gifting to see the impact on your children’s lives
Trusts can also be used to mitigate IHT because when wealth is put into trust it will sit outside of someone’s estate which will reduce the overall IHT bill. Another way to mitigate IHT while helping your children early in life is to explore whether you are able to gift wealth outright during your lifetime and not as part of your overall estate when they pass away. Under the IHT annual gifting allowance individuals are permitted to give away up to £3,000 a year. Anything over this and the child might get charged inheritance tax unless you survive for seven years after you make the gift, so it is worth gifting earlier on in life if you can. Gifting during your lifetime also gives you the opportunity to watch your children enjoy the extra money. Depending on the size of the gift this could enable them to get their first foot on the housing ladder or help them as they start a family of their own.
Save for your child’s future
Most mothers will want their children to have the best start in life when they become adults. One way to provide a helping hand is to start saving for a child from right after they are born. There are lots of different options for parents wishing to do this and one of the most popular options is a Junior ISA. However, under Junior ISA rules when a child reaches age 18, the Junior ISA becomes an adult ISA and the child gains control over how the money is spent, which might give cause for concern to some parents who may not feel their 18 year old child is responsible enough to have access to this money. Alternative options to a Junior ISA include a parent simply maximising their own ISA allowance before they invest in a Junior ISA. Contributions made to an ISA in a parent’s name can still be used to fund the child’s future, but the parent would retain control over when and how the money is spent. Another option is an offshore bond – which offer parents similar tax advantages to a Junior ISA as the funds can grow tax free (except for withholding tax) and there is no capital gains tax. When it comes to withdrawals, if the parents assign segments of the offshore bond to their child (when they reach 18) there may be no income tax to pay if the child is not working and the growth is below the relevant personal and savings allowance.