The birth of a new baby is a time for joy and celebration. Alongside sleepless nights and the natural worries that come with parenthood, the arrival of a baby can bring families together with mum and dad turning to grandparents for physical and emotional support.
Parents and grandparents will naturally want the very best for their children and that should extend to the family finances too.
Here are just a few of the financial steps every new parent should consider.
Update your wills
The importance of having a will cannot be understated and even more so when children arrive. A will not only sets out your wishes for what happens to your estate should the unimaginable happen, it also sets out your wishes for the future care of children under the age of 18. A new baby should act as a trigger to update or create a will.
It is important to discuss your wishes for the future care of children with those you choose to appoint as guardians, typically other family members or grandparents, to ensure they are happy to take on this responsibility and understand how you would like the child raised in your absence.
You may also want to consider what should happen if one of you were to die. Are you, for example, happy to leave assets outright to your spouse absolutely or would you like to protect the capital for your children over the longer term?
Life insurance
Most of us will have some degree of life cover, often ensuring any outstanding mortgage debt is repaid should mum or dad die. The arrival of a new baby is a good time to review that cover to perhaps provide an income for a surviving partner and the child to keep them in a lifestyle you would hope for.
Life cover can provide for the child too and it may be appropriate to write any pay-out into a trust should you die before the child reaches 18.
Death in service cover
Many employers offer staff a death in service policy that would leave their surviving partner with a cash lump sum if they were to die whilst employed and paid via payroll. Death in service benefit is often linked to the individual’s pension. It is important a new parent inform their employer of the arrival of a baby so death in service nominations can be updated to include new family members.
Private medical cover
Where private medical cover is offered by an employer check whether it extends to family members. If not, there is often the opportunity to extend that cover albeit with additional contributions.
Child benefit
Child benefit is available for parents of children under the age of 16 or under 20 if in full-time education. The first child will receive £24 a week with an additional £15.90 a week for subsequent children. Those earning over £50,000 a year may find child benefit claims repaid via additional income tax payments. Irrespective of earnings, it can be worth claiming child benefit as it ensures continued National Insurance credits that count towards the state pension.
To claim child benefit, parents will need to complete the claim form CH2, which can be accessed here.
Tax-free childcare
The Government will contribute up to £2,000 a year towards childcare costs under the Tax-free Childcare Scheme. The scheme is available to parents with children aged 11 and under, or 17 and under if disabled.
To be eligible both you and your partner must be working and not receiving tax credits or universal credits. A Tax-free Childcare Scheme account will need to be opened with parents paying into that account. For example, if you pay into that account £80, the government will a further contribute £20. For further information or to create an account visit www.gov.uk/sign-in-childcare-account.
Open a junior ISA
It is possible to pay up to £9,000 a year into a junior ISA, a tax-free savings or investment product designed specifically to encourage families to save and invest in their child’s future. Parents, grandparents, family members and even friends can contribute.
Cash invested in a junior ISA is, however, locked into that savings wrapper until the child reaches 18. It is considered their money and they can choose to spend it as they wish. If the money is not taken by the child, it will automatically roll over into a normal adult ISA.
Junior ISAs are a tax-efficient savings wrapper and a terrific way to provide a nest egg for children, but mum and dad will lose control of that money as soon as it is invested.
Grandparents and gifts
There is considerably greater flexibility for grandparents to gift money to grandchildren should they have the means to do so. However, grandparents will want to ensure that any gifts will be used responsibly.
There are two common ways that grandparents may wish to consider – a pension fund for grandchildren or the creation of a trust.
Grandparents can contribute up to £2,880 a year to a pension fund for grandchildren to which HMRC will add £720. Whilst this cannot be accessed until the grandchild reaches retirement age, given the period of capital growth this could provide a substantial legacy for grandchildren in their own retirement.
A trust provides greater flexibility and can open the door to significantly more sizeable contributions. A trust may be used to provide for school fees or perhaps a deposit on a first home. There are, of course, the additional benefits of reducing exposure to inheritance tax.
Trusts do, however, come with tax and compliance obligations and specialist advice should always be taken. Please get in touch with our experts below if you have any questions.
