By Lisa Lloyd, Wealth Planner
These days you’re considered to be in a privileged position if you or your spouse can afford for one of you to give up work to have children. In my experience, couples considering giving up a salary (not to mention other work benefits, such as a pension and life cover) are surprisingly unprepared for what that means. Rarely do they have an ongoing plan to maximise tax-saving opportunities and minimise financial loss during the years that one of them isn’t working.
If you or your partner are thinking about giving up work, or already have, here are some of the things you should be thinking about:
Don’t lose track of your pension(s)
If you’re the person taking a career break, I’m guessing that the last thing on your mind is your pension. It’s so easy to lose track of them – especially if you’ve had several employers over the years. Now is a good time to consolidate, pulling them into one place such as a Personal Pension. This is easier to do than you think. Most Pension providers will deal with your existing pension provider(s) on your behalf once the transfer process has been requested and Sanlam can facilitate you moving them into one place.
If you decide to leave your pensions where they are, make sure the providers have up-to-date addresses for you and keep your annual statements in a safe place. This sounds obvious but many clients are desperately trying to track them down when they’re close to retirement; as they don’t know where they are or how much they’re worth.
Just because you’re not working, doesn’t mean you can’t save into a pension
If your partner is a high earner, it makes sense for them to pay into a pension on your behalf. They can invest up to £3,600 a year, inclusive of tax relief. This is especially beneficial if the earner is nearing their annual pension allowance (usually £40,000) or is in tapered allowance territory (where their annual allowance reduces the higher their salary is).
Pensions don’t just come with tax benefits on the way in. On death before age 75, the pension pot will pass to your nominated beneficiaries’ tax free and free from inheritance tax. This pot of money can be passed down through generations so it makes a lot of sense to shelter your money in a pension from an estate planning perspective too.
Use your ISA allowance
If you can, make use of your £20,000 annual ISA allowance, as you can shelter £40,000 tax free between you and your spouse, per tax year. This is particularly useful for those who pay a higher or additional rate amount of tax.
You can either save into a cash Isa, where your savings are readily accessible (albeit you will lose your allowance when you withdraw it), and you won’t pay tax on interest earned. Or you can save into a Stocks and Shares ISA, which should offer better investment returns over the medium to long-term. This is a good way of saving for future school or tuition fees, or large expenses such as moving home.
Life and critical illness cover
It’s easy to think that the person staying at home looking after the kids doesn’t need life cover – after all, they’re not earning a salary. What most people forget is that their role has a currency, and if they were to be ill or die, then it would cost money to pay someone else to carry out those duties. For childcare, that can amount to a lot – around £25,000 per year, per child. In comparison, the cost is invaluable to insure and protect you and your family, against a critical illness or death. In my opinion, that’s worth every penny.
When one of you gives up work to look after children, it’s time to start thinking about your finances holistically. The sooner you can do this the better – ideally before baby arrives! It’s a great time to seek help from a financial adviser as they are likely to save you money in the longer-term, as well as help you adjust financially to your changing circumstances.