When it comes to planning your family, don’t overlook the financial preparations.
It is the moment in life when everything changes – and with so many things to think about, new parents do not always consider how having children might change their approach to financial planning. But as your family grows, it is imperative to review the potential impacts on your finances – not least so you can be sure you’re protecting your children.
Check your pension rights
The good news is that if you are taking maternity, paternity or adoption leave, you will usually retain your NHS Pension Scheme membership, and be able to continue making contributions to your pension savings. The only exception is for locums, who can only contribute to the scheme during periods when they are working. If you have told your employer that you will be returning to work following your leave, it will also continue contributing during your time out.
If you’re not currently a member of the NHS Pension Scheme, by the way, now may be a good time to consider joining. It is not possible to join while you’re on maternity leave, so study the benefits of membership prior to your leave.
Members may find their pension contributions change during maternity, paternity or adoption leave. These contributions are defined according to your pensionable pay during these periods; in turn, that depends on your eligibility for pay while you’re on leave, as well as your entitlement to statutory pay. Check with your employer to find out the detail.
Staff who receive full pay while on leave will make contributions paid on their normal pensionable pay. Those who receive half pay will make contributions based on their reduced pensionable pay, and if you only receive statutory benefits, your contributions will be based on this level of income. You may even take periods of unpaid leave, in which case contributions will be based on the pensionable pay you received immediately before the unpaid leave begins.
Irrespective of which of these categories you fall into, you will continue to make the same contribution, in terms of percentage of pensionable pay, as applied immediately before your leave. Your pay level also has no impact on your employer’s contributions – they will continue to pay into your pension on the basis of your pensionable pay before any reductions were made during your leave.
Overall, the impact on your final pension for a period of maternity, paternity or adoption should therefore be limited. You may be slightly worse off because you made lower contributions while you were on leave – assuming your pay was reduced – but this should not be too significant. Still, if you are concerned, perhaps because you have taken several periods of leave, it may be possible to make up the shortfall with additional contributions to the NHS Pension Scheme.
Returning to work
Once you return to work, you need to continue thinking about your pension rights – and also weigh up the protections that the NHS Pension Scheme offers you and your family.
On the first of these issues, you may be returning to work on different hours – perhaps no longer working on a full-time basis. In which case, this will mean less pensionable pay – and therefore lower pension contributions and, in the end, reduced pension benefits. This could also reduce the value of other NHS Pension Scheme benefits. Good financial planning will help prepare you for this.
As for protection, the NHS Pension Scheme offers an excellent range of benefits that could prove invaluable to your loved ones. These include a death-in-service benefit, providing your dependents with a cash lump sum worth roughly twice your pensionable pay that is payable immediately on your death. In addition, on your death, your dependents would receive a short-term pension, worth the equivalent of six months’ full pensionable pay, and a dependents’ pension, payable when this first pension comes to an end (assuming you have two years’ continuous service, depending on which scheme you’re in).
Arranging extra protection
It is unlikely that these benefits will provide sufficient protection for your family in the event of an unexpected setback. A financial adviser can help you identify how much – and what type of – protection you need to ensure you can have complete confidence in the financial safety net you have set up for your family. Three benefits, in particular, are worth considering:
- Income protection insurance pays out if you can no longer work due to illness or an injury, with benefits payable until you’re able to return to work, you reach retirement or you die. Such policies pay out up to 65% of your gross income on a monthly basis and you can make multiple claims if needs be. The terms of these policies vary considerably, so getting expert advice is important. Some pay out if you cannot perform your “own occupation”, while others require you to be unable to perform any occupation in order to pay. Another feature to consider is the waiting period before you can make a claim; the longer this is, the lower your premium will be, so it makes sense to dovetail your cover with your work sick pay benefits. Income protection is particularly valuable if you have children to provide for, but you should aim to arrange your cover before you take leave, so that you’re insured while you’re out of the workplace. Insurers will usually defer acceptance of applications from pregnant women until after the child is born.
- Life insurance pays a cash lump sum, typically tax-free, if you die during the period of the cover. Some cover may pay an income instead. The cost of life insurance depends on a variety of factors, including your age, health and lifestyle – as well as, of course, the amount of cover you need. You need to also ensure you set your life insurance needs taking account of the NHS Pension Scheme’s death-in-service benefits.
- Critical illness insurance pays a cash lump sum if you’re diagnosed with a serious illness or have an accident that leaves you unable to work. This cash can be used to pay off a mortgage, but it can also be an ideal way to fund other family costs, such as school fees or pension planning.
Don’t forget that your spouse or partner suffering a serious illness or passing away would also have a huge impact on your family finances. If they work, you will lose their income. If they currently take on the lion’s share of childcare responsibilities, you may need to pay for this in future. Good financial planning will take the whole family’s needs and circumstances into account.
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This is a marketing communication and not purely for information.
Content correct at the time of writing and is intended for general information only and should not be construed as advice.