MANAGING YOUR MONEY WITH CHILDREN

Jason Butler,

Head of Financial Education, Salary Finance

STUFF HAPPENS.

We’ll all face many changes in our lives, many of which involve money.

Some will be welcome, like starting a family – the subject of this guide. Others will be more challenging. Some are planned and happen slowly, while others come suddenly and out of the blue.

A HELPING HANDTo help when these changes happen, we’ve produced a series of easy-to-read guides.

Each guide looks at a different, life changing event, and sets out simply and clearly what you need to know and, more importantly, what you need to do to make smart money decisions.

MANAGING YOUR MONEY WITH CHILDRENHaving and raising children is one of the biggest and most rewarding challenges you can face in life. Children shift your focus from concern for yourself to concern for the care and development of your new family member(s).

Nothing can prepare you for the range and depth of emotions you will face when becoming a parent.

• From the never-ending, sleep-deprived exhaustion when they’re very young… to the less frequent but more annoyed exhaustion of waiting up all night for them to come home as teenagers!

• From the sheer amazement at having this new person in your life and the excitement at every new skill they develop… to the anxiety you feel about their safety as they take their first steps and later when they start riding a bike or driving a car on the road.

• And, from the immense frustration at the mess they make (and how they talk to you) when they reach their teenage years… to the pride you have about their progress in school and their other activities… and at what they achieve in the world of work later on.

This is a time of mixed emotions and uncertainty.

WHAT’S IN THIS GUIDE?

This guide aims to explain how you can reduce the stress of managing your money, allowing you more time to spend with your children and enjoying each step of the journey.

We only touch on some of the topics and tips for this, so we recommend you use this as a starting point and follow up to find out more on the issues that affect you.

JUMP TO:

What’s the cost of raising a child?

Make sure you know what you're entitled to

Avoid the child benefit tax traps

Control your spending

Finding the right home in the right location

Protect your family

Start funding your child’s future

Checklist

Important notes

WHAT’S THE COST OF RAISING A CHILD?How much do you think it costs (on average) to raise a child in Britain from birth until they’re 21 years old?

More than half of people surveyed thought it was less than £100,000… and more than 25% thought it was less than £30,000.*

The actual cost, according to the insurer LV, could be as much as £230,000, if you include some money for university support but exclude private education.

The Child Poverty Action Group (CPAG) estimates the basic cost of raising a child to age 18 at around £75,000.

This figure excludes additional housing and childcare costs, which vary and may be offset with state support as we’ll see later in this guide. Include those costs and the estimate rises to £185,000.

Unsurprisingly, the costs are substantial. That makes it essential to keep a lid on your spending and get good value on the money you do spend.

*(2015 Survey by Ipsos Mori)

MAKE SURE YOU KNOW WHAT YOU’RE ENTITLED TO

If you’ve not done a full check of your entitlements recently, then this is for you. And by entitlements we mean: leave for welcoming a new child (maternity, paternity, shared parental leave etc.), as well as childcare vouchers and tax credits.

There’s a vast array of support available to help with caring for your children. The benefits system is extremely complex, so we can only outline the key benefits in this guide.

Details can vary from year to year so check the current details from a more complete list of the help available to parents by following this link and check what you’re personally entitled to here

The benefits available to help you support your children could include:

MATERNITY LEAVE AND PAY FOR MOTHERS

You’re entitled to a year of Statutory Maternity Leave, regardless of how long you’ve been in your job. However, your rights upon return to work may be slightly reduced if you take more than 6 months off.

If you’ve been in your job for 26 weeks by the time you’re 15 weeks away from your due date and you earn more than a threshold amount, you may be able to claim Statutory Maternity Pay (SMP) for 39 weeks of your leave.

SMP pays 90% of your average earnings for the first 6 weeks and then reduces to whichever is lower: £145.18 per week or 90% of your average weekly earnings for the remaining 33 weeks.

More details on the amounts payable and the rules (both of which can change from time to time) can be found here

Some employers pay more than the statutory minimum, paying amounts that are more in line with your normal wage for a longer period of time. Check your employment contract and ask your employer to confirm your entitlement. They are obliged to make the payments to you.

And be sure to provide sufficient warning ahead of your maternity leave – at least 15 weeks before your expected due date.

PATERNITY LEAVE FOR PARTNERS

If you’ve been in your job for 26 weeks by the time your partner is 15 weeks away from their due date and you earn more than a threshold amount, you may qualify for paternity leave.

You can choose to take one or two consecutive weeks at some point within 8 weeks after the birth. If you have more than one year's service at work, you might be able to take unpaid parental leave in addition – and have more time to support your new family.

The Statutory Paternity Pay (SPP) is £145.18 per week (2018-19) or 90% of your earnings if this is lower. But, as with maternity pay, some employers offer better terms. So, check your contract and speak to your employer.

SHARED PARENTAL LEAVE AND PAY

This option could allow both you and your partner to take a reasonable amount of time off (at different times) after the birth or adoption of a child, to share the time off to care for your new addition. Fathers are still entitled to two weeks of paid paternity leave and mothers must still take the initial two weeks after birth. But, they can then cut their maternity leave short and exchange it for shared parental leave.

In deciding whether shared parental leave is the right option for you, compare the amounts of your prospective shared parental pay (for both you and your partner) to what you might get under a maternity or adoption leave pay arrangement.

The statutory minimums might be a lot lower with a Shared Parental Pay arrangement for the first 6 weeks, and top-up payments with some employers may be lower too.

Check your entitlements using the government’s calculator which also looks at paternity and maternity leave, to give you a good overview of your options.

ADOPTION LEAVE AND PAY

The rules for adoption leave and pay are similar to those for maternity pay. More details here

SURE START MATERNITY GRANT

This grant is a one-off payment of £500 to help with the costs of a new child – and is usually only payable if you have no other children aged under 16.

You must claim it in the period from 11 weeks before a baby is due until three months after the birth (or three months after the adoption, residence or parental order if you’ll be responsible for a child under 12 months old).

The grant is only available to those on a ‘qualifying benefit’ when the claim is made. Find out more here

CHILD BENEFIT

You may be able to claim this valuable benefit if:

• You’re responsible for a child under age 16 or

• Your ‘young person’ is still in education (like A levels, GCSEs or NVQ/SVQs).

Child Benefit can continue after your young person turns 19, provided they were enrolled on their course before age 19. And the benefit stops at age 20, or when they finish their course if earlier.

The amount for your first child is £20.70 per week, with £13.70 being paid for subsequent children.

If you or your partner (that you live with) have a taxable annual income of more than £50,000, some or all of your Child Benefit may be paid back through a tax charge. More on this later.

You will normally get a claim pack when your baby is born, or you can call the Child Benefit Office on 0300 200 3100, or follow this link

FREE CHILDCARE FOR PRESCHOOL CHILDREN

There are many different government-funded schemes offering free childcare for children aged four and under across the UK. Each scheme has its own rules, so check what’s available and right for you. Here’s a summary of the three schemes currently available in England:

• 15 hours per week free childcare (in term time) for all 3 & 4-year-olds

This is available regardless of what you earn or the hours you work. Contact your childcare provider or local council to apply.

• 15 hours per week free childcare for 2-year-olds

This may be available if you’re receiving a ‘qualifying benefit’ or your 2-year-old child is classed as having additional needs. Contact your childcare provider or local council to apply.

• 30 hours per week free childcare for 3 & 4-year-olds

This help may be available if you (and your partner) expect to earn more than the equivalent of 16 hours a week at your national minimum wage – up to £100,000 per year. (You may still meet the earnings requirement if you or your partner are on maternity, paternity or adoption leave). You can apply for this help whilst you or your partner earn up to £100,000. Application is made online here where you set up an account and get a code to give to your childcare provider.

Free childcare is available in addition to other help with childcare costs – either through working tax credits, universal credit, tax-free childcare or childcare vouchers.

CHILD TAX CREDIT

Child Tax Credit (CTC) may be available if you’re responsible for a child under 16, or for a young person under 20 in certain types of education or training.

The amount of your CTC will depend on your household's income. To work out how much you could get, use the government’s calculator Further details and notes on how to apply are available here

WORKING TAX CREDITS – CHILDCARE ELEMENT

If you meet the conditions for Working Tax Credit you may also be entitled to help with childcare costs under that benefit.

The maximum award is currently £122.50 a week for one child, or £210 for two or more – but the amount you get depends on your income.

To work out any extra tax credits you could claim to help with child care costs, use this government calculator

The childcare element of Working Tax Credits is normally only payable where the parent works 16 hours or more, or (if there are two adults) both work 16 hours or more. You could, in theory, use childcare vouchers at the same time as tax credits, but most people save more money using the Working Tax Credit childcare element alone.

However, you can get up to 30 hours per week of free childcare at the same time as claiming tax credits.

UNIVERSAL CREDIT ROLL-OUT

If you already receive tax credits you may be able to add the childcare element to your claim. However, tax credits are being replaced by Universal Credit across the UK and if you need to make a new claim you’ll need to check if that should be for Universal Credit. Find out more about Universal Credit and the benefits it’s replacing here

TAX-FREE CHILDCARE & CHILDCARE VOUCHERS

Both tax-free childcare and childcare vouchers aim to help you with childcare costs. You can only use one or other of these schemes – so you can’t use tax-free childcare if you are receiving Universal Credit or tax credits.

Childcare vouchers were provided by employers through a salary sacrifice scheme – allowing you to avoid paying National Insurance and income tax on your child care costs. They’re no longer available to new applicants from October 2018, but you can continue receiving vouchers after October 2018, if you joined up before that date and stay with the same employer.

With tax-free childcare, eligible parents open a childcare account which is topped up by the Government (up to £2000 per year per child) to cover 20% of childcare costs.

To work out how much you could save on childcare costs and to compare childcare vouchers (if you’re already entitled to them) with tax-free childcare, tax credits and Universal Credit, use this online calculator from the Government.

WHAT NEXT

As mentioned, there is a vast array of support available to help parents pay for the care their children need. But the benefits system is extremely complex and constantly evolving.

So, if you feel that you’d like some personal help in navigating this information minefield, talk to someone at a Citizens Advice Bureaux or one of the other agencies listed here

And make sure you get the financial help that you’re entitled to

CONTROL YOUR SPENDING

We all know it’s important to keep our spending under control – but it’s essential once you have more mouths to feed.

There are plenty of websites and TV programmes offering ideas for saving money on the things you buy – from baby walkers to school clothes and holidays. But remember… controlling your spending is really about two things:

1. Getting great value on the things you must buy. That often includes avoiding expensive brands and buying second hand where it’s an option and makes sense.

2. Avoiding spending on things you don’t need. Putting a few days of ‘thinking time’ between your ideas for new discretionary purchases and going ahead with them, will help with that.

That way you’ll break the cycle of debt and avoid needing more credit when an expensive emergency crops up.

It’s worth remembering that just £3 a day of savings (the price of a cup of coffee!) can see you put aside more than £1,000 for emergencies each year.

You’ll find more ideas on spending control and debt repayment in Season one of Money Insights on the Salary Finance Website

And it’s worth seeing just how quickly you could save money by cutting out wasteful spending with this ‘cash finder’ tool

AVOID THE CHILD BENEFIT TAX AND PENSION TRAPS

If you or your partner earn more than £50,000 per year, your child benefit will start to be taxed away – and will be completely taxed away if either of your incomes exceed £60,000.

The result depends on how many children you support – but it could be an effective tax rate (on your income between £50,000 and £60,000) of somewhere between 50% and 75%!

You may be able to reduce this tax with some simple financial planning. So, if you think this issue could apply to you, seek good quality financial advice.

WARNING:

Not registering for child benefit (if one of you earns more than £60,000) may be a mistake if you look after your children when they’re under the age of 12, rather than working. This is because claiming child benefit triggers accrual of valuable state pension credits while you’re not earning.

You can register for child benefit (to secure your state pension accrual) whilst choosing not to receive the benefit payments (to avoid the need to pay a tax charge)!

You cannot, currently, backdate child benefit registration more than three months. So, if you’ve only just become aware of the issue, unfortunately you’ll not be able to accrue state pension credits for child caring more than three months previously.

So, make sure you do the right thing for your circumstances. If you need more help or information, go to www.gov.uk/child-benefit or phone the Child Benefit Helpline on 0300 200 3100.

FIND THE RIGHT HOME IN THE RIGHT LOCATION

Having children brings this challenge into sharp focus. If your family’s getting bigger and you need more space, or if you want your children to attend a particular school, you might have to move.

Here are some of the bigger factors to consider in choosing your new location.

DO YOU NEED TO MOVE INTO A SCHOOL CATCHMENT AREA?

If you want to move into the catchment area of a popular school, be prepared for some competition.

Depending on where you live, between 10% and 40% of houses are being bought or rented for the sole purpose of getting children into schools. And the result is that home prices in popular school catchment areas can cost anything between 10% and 40% more than those just outside

About a quarter of parents buying in popular areas admit to being overstretched on their mortgage. About 20% change jobs for this reason and about the same proportion actually downsize in order to afford their property. About 40% of families see this challenge as temporary and move back out of their target catchment area when their child has secured their place.

Understanding the extra cost and hassle of moving into the catchment area will help you decide just how important it is to have your child attend a specific school.

Note also that being just inside a school catchment area does not guarantee the offer of a place. So, check your preferred school’s admissions policy, their priority acceptance criteria if they’re oversubscribed – which many schools will be – and recent history of applications. You should be able to find all this information from the school or their local authority.

WHAT OTHER FEATURES OF A HOME MATTER TO YOU?

Make a good list of the ‘must-have’ features of your new home and its surrounding area. You can always change the internal décor over time but what about the things beyond your control?

For example, if you must accept a home that’s not quite as big as you’d like, will there be scope to extend it if you want to, later on? A conversation with local estate agents and architects should quickly answer that one.

Then there’s the difference in the cost of childcare in your target area. You can get an idea of the London premium and links to research other areas here

And how about the features you can see when you view your potential new home? Things like off-street (or reliable on-street) parking, the size of the garden (or proximity of a good park) or having some shops nearby. You may also want to live within walking distance of a town to save money on taxis when going out.

Your work commute time (and cost) may also be a big factor to consider: most people would agree that sitting in traffic (or on a train) at 7pm every night and missing bath time is not a great recipe for good relations at home.

So, try to get as clear as you can on the compromises you’re making before you commit to buying a new home.

CONSIDER A LATER MOVE

In many areas, including big cities, you may find nursery and primary schools you’re perfectly happy with, even if you’re not in a perfect position for your ideal secondary school.

So, if you have enough space where you are, you might find that a home move as your eldest child approaches secondary school age, can give you the best of both worlds.

CONCLUSION ON HOUSING

There are a lot of factors to consider when moving home with children and schools in mind.

So, do your research on your preferred schools and on your potential new home. In terms of the home, be sure to view it on different days and at different times - and, if it’s a university area, during term time too.

If you’re unsure about the area, you can always try before you buy by renting first.

PROTECT YOUR FAMILY Unfortunately having children can make you think about the morbid possibility of not always being there, and if you’ve not recently reviewed health and life insurance cover for yourself, then this is for you. A great way to start tackling this issue is with a simple question:

HOW MUCH ARE YOU WORTH?Have a good think about how much money you or your family would need to carry on your (or their) lives in the way you’d want, if you were to suddenly die or suffer a serious illness.

Some employers may provide Life Insurance, which is worth looking at to understand what is provided and what additional cover you may want to purchase. In the event of a serious illness, your earnings may be massively reduced - after any short period of support from your employer - and it is worthwhile considering how your family would cope.

When considering your ‘worth’ don’t forget the unpaid work you do each week to keep things running smoothly at home – and who would do that work if something happened to you. Or, if you don’t do most of the home chores, who does it for you? And what would it cost to pay someone else to do that work, if your partner / homemaker was no longer there or able to help.

INSURE YOURSELVES – IT’S NOT AS SCARY OR COSTLY AS YOU THINK

Most people don’t think the worst will happen to them and many people avoid thinking about it. But, with children (and/or partners) involved, the potential impact of a life or health disaster can be enormous.

Thankfully, because the chances of these disasters are (normally) low, the cost to insure against them are, typically, very low too. For example, a life insurance policy that pays out £250,000 in the event of death at any time within a 10-year term, might cost a healthy 30-year-old less than 33p a day (£10/month).

And whilst insuring against long term illness is a bit more expensive, all these types of insurance (if bought whilst you’re relatively young and in good health) are very low cost for the peace of mind they can give you and your loved ones.

TAKE ACTION NOW

As with most things in financial planning, the need for action is easy to understand.

But working out how much cover and what policy you need, sourcing and sifting through quotes to check their terms and conditions – and exclusions – as well as setting up trusts for life insurance, can be a chore.

Talk to your employer to find out what, if any, life and ill health cover they already provide for you. Or, what extra cover they could offer at a competitive cost.

There are a number of resources to help decide what type of insurance and cover is best suited to you and your circumstances:

Details on life insurance

Details on illness and disability insurance

Find a financial advisor

START FUNDING YOUR CHILD’S FUTURE

If you want to build a fund to help a child through university, college or training – this is for you.

If you don’t have money already set aside for this goal, you may want to start saving (or investing) for it as soon as you can – for two reasons:

1. First (and unlike your other goals), you can’t delay this one. You really can’t tell your child to delay their studies whilst you catch up on your savings plan.

2. Second, a delayed start either means that your payments will be a LOT higher when you do start saving… Or there’ll be a lot less money to support your child with their studies.

A regular investment of about £75 per month (£900 each year) over 18 years could potentially deliver the £21,000 fund you want to support your child when they start further education. Assumptions: These numbers are all in today’s money terms and assume 3.5% p.a. real investment returns and that the regular investment input is maintained in line with inflation over time.

Delaying the start to your savings on this goal for, say, 9 years (halfway to 18) would more than double what you’ll need to put in. So, instead of £75 per month, you’d need to start saving £170 per month to reach the same target – that’s if we assume the same growth rate on your money. However, you might not want to take as much investment risk when you’re closer to your financial goal. So, you might then reduce the assumed return on your money, which would increase your required input amount further.

A 9-year delay before you started saving into standard bank accounts might mean you’d need to save nearly £200 per month to reach your target. That’s nearly three times as much each month – compared to if you started saving when your child was born. And remember, these numbers are all in today’s money terms. Future inflation will simply increase the amount you have to save.

This picture sums up two extreme funding options for a parent (with no existing funds set aside) who wants to provide £7,000 of maintenance support to their child for three years of university (so, that’s £21,000 total):

£7k

£6k

Costs (p.a) of University savings plan Costs (p.a) with NO savings plan

£5k

£4k

£3k

£2k

£1k

£01 7 13 194 10 162 8 14 205 11 173 9 15 217 12 18

SAVING OVER THE LONG TERM IS THE BEST SOLUTION

WHAT SHOULD YOU SAVE OR INVEST INTO?

The right type of financial product for you, and the best types of fund to hold inside that product, will depend on many factors, including: the size of fund you’re looking to build, any funds you have set aside now (or expect to have in the future) and other aspects of your personal financial situation and attitude to investment risk.

So, it’s impossible to provide specific solutions in a guide like this or in a newspaper or blog article. However, we can say that to make smart money decisions you need to follow a smart money checklist like the one we outlined in Season Two of our Money Insights.

HOW TO CHECK ANY INVESTMENT – IN 6 STEPS

Any investment or savings product you consider for any of your life goals should, ideally, score well on most of these checks:

1. What can you pay into this product? Most tax-advantaged financial products – or those that enjoy free bonuses from the Government – have limits on the amounts you can pay in. So, look out for those.

2. Are there any freebie contributions? There’s a 25% free bonus on some ISA products and your employer adds free money to your pension plan when you pay in. And if you qualify for it, the Help to Save scheme offers a 50% bonus after two and four years. Freebies are, obviously, worth having if the product fits your goals in other ways.

3. What are the tax benefits on this product? Think about the tax on your money in four ways: is there tax relief on paying money in, on the invested fund, on taking your money out, or if you die whilst your funds are invested?

4. Can you access your money when you need to? If you build a good emergency fund, you won’t normally need early access to any longer-term funds that you build. But there may be many other ‘access’ issues to consider and here are just two examples:

• If you do not want your child to have complete access to the entire fund that you’re building for them, then a Junior ISA (which gives them access at age 18) might not be the right product for this goal. The Help to Save scheme allows you to access your funds at any time, without losing the 50% bonus.

• You might not consider your company pension scheme as suitable for this goal because you won’t normally have access to your money until you’re 55 or older. Access is restricted until 10 years before your state pension age – and you can get an estimate of that here. But if this timing broadly fits with when you want to support a child through college (and you’ve not yet ‘maxed out’ on the available free money from your employer), then your pension plan might be a useful product for college funding too. It’s certainly worth thinking about.

5. What are the investment options? You’ll want access to the investment funds you need for the best chance of achieving this goal at a modest cost. And, for longer term regular investing, you may want stockmarket-based funds for their growth potential. If your goal in this area is coming up in the next few years, then cash deposit-type funds might be the better option.

6. What are the charges? Wherever you decide to save or invest, you’ll want to keep a close eye on charges – both on the investment product and any advice that you have on it. Overpaying by even 1% or less each year will seriously drag down your investment returns – and hence your final fund.

CONCLUSION

This checklist will help you make smart money choices on this – and any other financial life goal that you have.

Getting started early on your savings journey is key – and starting with simple bank savings is fine too. You can work out the best regular investment plan for your situation a bit later. Don’t let that job stop you from getting started.

MANAGING YOUR MONEY WITH CHILDREN - CHECKLIST

Understand the cost of raising a child

Make sure you know what you're entitled to

Avoid the child benefit tax traps

Control your spending

Find the right home in the right location

Protect your family

Start funding your child's future

IMPORTANT NOTES – PLEASE READ

This presentation / document is provided for educational purposes only.

Our aim is to help you make more informed decisions about your life and financial plans. This information is generic in nature.

We do not offer regulated financial advice. This means that we do not make specific recommendations for you to buy, sell or otherwise transact investments, or to engage in any investment strategies, or for you not to do any of these things.

You are solely responsible for any decisions that you make regarding your finances and investments. You are solely responsible for any losses that you may incur from the actions you take (or do not take) having read this educational material.

We do not take responsibility for the outcomes and consequences.

It is your responsibility to satisfy yourself as to the suitability of any particular investment or action you take.

Any figures that we provide here are only examples of possible costs or outcomes.

You understand the need to conduct your own due diligence before implementing investments, business plans, or other changes to your personal life.

If you require specific recommendations on investments or pensions or life assurance, then we strongly recommend that you appoint an appropriately qualified and regulated professional adviser to advise you in line with their own terms of business.

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