Thinking about how to finance your retirement may not be at the top of your priority list if you’ve just had a baby, but it’s still an important issue to consider. We look at the impact a break from work will have on your state pension and how to make sure that you can still afford to pay into a personal pension.
- Budgeting can help you contribute to your personal pension during parental leave
- Prolonged employment breaks can dent your chances of getting a full state pension
- Combining a pension with an ISA may offer greater flexibility
Guide to pensions for new parents
Being a new parent is a stressful time and thoughts of retirement and pensions will likely be the last thing on your mind, as Andrew Megson, executive chairman of My Pension Expert, points out.
“However, it is important to make and keep up with your pension contributions. If not, you may feel the strain in the future, especially when it comes to taking funds from the pension in your retirement,” he adds.
Not only do new parents have to cope with all sorts of new expenses, but they are likely going to have to do so on reduced incomes as a result of parental leave. It’s a good idea for all new parents to sit down and write out a proper budget, looking at exactly where their money is going each month so that they can focus on the essentials and cut back on other areas of spending.
You can do this the old-fashioned way with a pen and paper, or make use of one of the dozens of budgeting apps that are now available to use with your smartphone or tablet, like Chip or Money Dashboard.
The apps bring together information from your current accounts and credit cards to give you an overall insight into how and where you are spending your money. This can help you identify areas where perhaps you are spending more than you need to.
Doing this will make sure that not only can you comfortably cover the cost of nappies, baby wipes and milk formula, but you should also still be able to make at least some form of contribution towards your personal pension too.
However, this can have a knock-on effect on the state pension you will eventually receive, as the new state pension is based on your national insurance record. You need to have 35 qualifying years of contributions in order to receive the full new state pension, which at the moment is worth £185.15 per week (tax year 2022/23) [2].
If you do not have 35 years of contributions on your record, then you will receive a smaller state pension.
However, you can opt to make voluntary additional national insurance contributions in order to get a bigger state pension when you eventually retire, with these payments covering up to the previous six tax years.
You might also want to continue contributing to a personal pension even when you are having a break from work.
Again, budgeting will play a crucial role here in making sure that you can afford to top up your pension alongside covering your other essential spending.
He adds that ISAs offer a big advantage to new parents as the money is often available should you opt to take a longer break from work than originally planned.
“Ideally new parents will continue to save money in both pensions and ISAs while they aren’t working, although this might not always be possible,” he continues.
However, parents who earn more than £60,000 still have to apply for the child benefit in order to receive state pension credits. If they fail to do so, and so miss out on those pension credits, it may mean they receive a smaller state pension when the time comes to retire.
What’s more, the government will only backdate credits for three months, meaning many parents may have missed out on years of pension credits simply because of the complex set-up.
If you have any questions over your child benefit position, and what it means for your pension, it’s well worth calling HMRC’s child benefit helpline on 0300 200 3100.
“However, it is important to make and keep up with your pension contributions. If not, you may feel the strain in the future, especially when it comes to taking funds from the pension in your retirement,” he adds.
Budgeting for your contributions
Having a child is an expensive process. According to the Child Poverty Action Group (CPAG) the cost of raising a child from birth to age 18 comes to £160,692 for a couple and £193,801 for a lone parent [1].Not only do new parents have to cope with all sorts of new expenses, but they are likely going to have to do so on reduced incomes as a result of parental leave. It’s a good idea for all new parents to sit down and write out a proper budget, looking at exactly where their money is going each month so that they can focus on the essentials and cut back on other areas of spending.
You can do this the old-fashioned way with a pen and paper, or make use of one of the dozens of budgeting apps that are now available to use with your smartphone or tablet, like Chip or Money Dashboard.
The apps bring together information from your current accounts and credit cards to give you an overall insight into how and where you are spending your money. This can help you identify areas where perhaps you are spending more than you need to.
Doing this will make sure that not only can you comfortably cover the cost of nappies, baby wipes and milk formula, but you should also still be able to make at least some form of contribution towards your personal pension too.
Taking time out
Many parents opt to take a break from work in order to devote their energies towards raising their children.However, this can have a knock-on effect on the state pension you will eventually receive, as the new state pension is based on your national insurance record. You need to have 35 qualifying years of contributions in order to receive the full new state pension, which at the moment is worth £185.15 per week (tax year 2022/23) [2].
If you do not have 35 years of contributions on your record, then you will receive a smaller state pension.
However, you can opt to make voluntary additional national insurance contributions in order to get a bigger state pension when you eventually retire, with these payments covering up to the previous six tax years.
You might also want to continue contributing to a personal pension even when you are having a break from work.
Again, budgeting will play a crucial role here in making sure that you can afford to top up your pension alongside covering your other essential spending.
Combining a pension and an ISA
Patrick Connolly, chartered financial planner at Chase De Vere, argues that the best approach to long-term savings is usually to invest across a combination of pensions and ISAs.He adds that ISAs offer a big advantage to new parents as the money is often available should you opt to take a longer break from work than originally planned.
“Ideally new parents will continue to save money in both pensions and ISAs while they aren’t working, although this might not always be possible,” he continues.
The role of child benefits – even if you can’t claim it
Back in 2013, the government overhauled the child benefit system, so that the benefit is removed from higher earners. Individuals earning over £50,000 enjoy reduced payments, while those earning more than £60,000 don’t receive anything.However, parents who earn more than £60,000 still have to apply for the child benefit in order to receive state pension credits. If they fail to do so, and so miss out on those pension credits, it may mean they receive a smaller state pension when the time comes to retire.
What’s more, the government will only backdate credits for three months, meaning many parents may have missed out on years of pension credits simply because of the complex set-up.
If you have any questions over your child benefit position, and what it means for your pension, it’s well worth calling HMRC’s child benefit helpline on 0300 200 3100.
Who will benefit?
If you pass away before you get to access your pension, that money will be passed onto the named beneficiary. You will need to have a specific named beneficiary for each of your pensions – even if it is the same person, you will need to make sure all of your providers are informed of who that is.
While many people name their spouse as the beneficiary, some parents opt to change it so that their child is the named beneficiary instead. Generally, you can name more than one person as a beneficiary too, so it could go to all of your children.
Doing this should be relatively easy, you simply need to get in contact with your pension provider. Some providers even allow you to change the named beneficiary online.
Citations
[1] THE COST OF A CHILD IN 2021, Child Poverty Action Group
[2] Pension Calculator, GOV UK
