How to balance children and pensions

Juggling financial priorities isn’t easy, especially for parents who have to balance the substantial costs of family life with planning for the future.

| 9 min read

There’re lots of demands on our incomes these days, something that has intensified recently with the challenges of the rising cost of living. That’s especially the case for parents who have to juggle the substantial costs of raising children with planning for the future.

It’s hard to know how to balance these competing priorities, and there is no one-size-fits-all answer because our situations and goals vary. However, here’s a general checklist of how to look at your financial situation in light of those competing demands.

How to balance children with pensions

Happy family using laptops on kitchen table

1. Build your foundations

Family finances, just like a house, have to be built on firm foundations. Staying out of expensive debt and keeping your mortgage payments under control are the first steps, albeit this has become more challenging for many people as interest rates have risen over the past year.

Once your house is in order in terms of debt you can put other parts of your financial plan into place. Another important foundation is building a reserve of readily available cash to draw on in the event of an emergency.

Three to six months’ income is often referred to as a rule of thumb, though if you have kids to support, you’ll ideally want more to cover you if life takes an unexpectedly bad turn.

2. Protect your family’s future

Nobody knows what is around the corner, so important building blocks to your security involve protecting the family from the consequences of death, ill health or loss of income of one or both parents. If you are employed, you may have some of these often essential policies such as life insurance and critical illness cover provided for you as part of a benefits package. However, you should check the details of each policy and the level of cover provided to make sure they provide enough support for your circumstances.

If you don’t have them through work these insurance policies might seem like a monthly expense you could do without. But provided you are healthy they can often be very cost effective and give peace of mind that the family will be provided for in a worst-case scenario.

You should also make sure you make a will so your money and possessions can be distributed according to your wishes if you die. In particular, it is worth noting that unmarried partners and partners who have not registered a civil partnership cannot inherit from each other unless there is a will, so the death of one partner may create serious financial problems for the remaining one. A will is also important to make arrangements for children if either one or both parents die.

3. Get your retirement on track and take advantage of ‘free money’

If you are employed, you will be entitled to pension contributions made by your employer, as long as you keep opted into your work scheme and make the required level of contributions yourself. Although this isn’t a near-term priority when children and family finances are concerned, you should generally maintain this form of investing as far as possible as it is often the most efficient way to provide for retirement by some distance.

Your retirement can also get an extra boost from pension tax relief on payments into a personal pension. This contribution from the government can have a considerable impact on the size of your investment pot and the retirement income you can achieve. The government will automatically top up your contribution with 20% basic rate tax relief. Higher-rate and additional-rate taxpayers may claim up to a further 20% and 25% respectively back through their tax return. Consider a Self-Invested Personal Pension (SIPP) for extra pension freedom and the ability to select from a very wide range of investments.

4. Set your children’s goals

To save and invest for the future in a methodical and efficient way it's important to set goals for different ‘pots’ of money and consider whether they are short-term or long-term in nature. Shorter-term needs are generally considered to be less than five years, perhaps putting money aside for a new car or for a house deposit for example. Longer-term goals include getting ready for retirement or preparing for school or education fees likely to be incurred in at least five years’ time.

Short-term needs are best addressed through saving cash and long-term ones through investing. Unlike cash, riskier assets do not offer security of capital, but over the long term, they tend to do better and therefore they build wealth more effectively.

Your goals not only inform you how you should invest, but also the appropriate type of account. Don’t forget to use appropriate tax ‘wrappers’ for your investing goals such as a pension for retirement, ISAs for earlier access and Junior ISAs for children’s longer term investing. By placing your money in pension or ISA wrappers you can save tax and make your investments work harder for you. You won’t pay capital gains tax on any profits and there’s no tax on dividends from shares or the income earned on bonds.

If you want to set aside money for a child once they turn 18, a Junior ISA is a useful option for family and friends to build up tax-efficient savings and investments for them. The tax benefits are the same as an adult ISA – no capital gains tax, and no further tax to pay on income. Withdrawals are possible from the age of 18 when it automatically converts to an adult ISA, meaning the pot can be useful to help with the cost of university or a deposit for a house.

When your children are old enough it is a good idea to talk to them about money. Currently there tends to be little in the way of financial education in schools so there can be significant knowledge gaps in this area. Instilling the importance of saving and financial planning will help them develop good financial habits that will benefit them throughout their lives.

5. Start planning and investing early if you can

The earlier you start saving, the more time your money has to grow. Even if you can only save a small amount each month, it will add up over time – thanks in part to the powerful effect of compounding. It will also help to map out your financial goals – how much money you think you will need and when –to construct a plan to reach them. Once you have been through this exercise you will be able to better judge when you can meet these goals and how to plan your strategy.

Of course, much can change for the better or worse so it is also important to be flexible. Maybe you have more or less disposable income to fund savings and investments than you thought. Perhaps your investments are doing better or worse than anticipated. In any plan a lot of assumptions have to be made and it is unlikely things will go exactly how they are modelled in advance. Yet having and a goal in mind, and a roadmap to meet it, will help keep you focused on it and better allow you to take corrective action where necessary.

Give your finances a health check

Couple meeting financial advisor

Balancing childcare costs with retirement savings is a challenge, but with some careful planning and budgeting you can set yourself up for a secure financial future for both you and your kids. You also don’t have to tackle it on your own.

Having a conversation with a financial professional can help you to take control of your finances, giving you freedom and peace of mind. With our OneStep Financial Health Check you’ll get a consultation with a Financial Planner and a clear action plan to take home with you. Having a conversation with an expert can help you to take control of your finances, helping you find freedom and peace of mind.

Find out more

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Guide to Investing for Children

Whether it's saving for school or to provide a deposit on a first home, giving your children or grandchildren a good start in life is among most people’s top priorities. Our free guide to Investing for Children is the perfect starting point for you to become more invested in the next generations’ financial future.

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