How to build a financial safety net for your children
ARE you planning on starting a family in the near future?
Well, here's a surprise for you. Did you know you can instantly secure your new baby's retirement, even though it is in the far distant future?
This is one of the great secrets in financial services. Few parents know that you can open a ‘Children's Stakeholder Pension' for them, and that your new arrival can be a little ‘pensioner', even though they are only a few days old!
There is tax relief at 20 per cent, meaning that of every £100 that goes into the pension, you pay only £80 – the remaining £20 is paid by the taxman.
According to the current rules, parents can pay up to £2,880 a year into their child's stakeholder pension, which the 20 per cent tax relief takes the total to £3,600.
Now, while you do have to be the parent or guardian to set things up, the great thing about a children's pension is that contributions don't have to be just by parents. Any family member can contribute to the pot, which makes the Stakeholder Pension an ideal vehicle for grandparents to save for their grandchildren.
The advantage of the pension is that the money is safely locked away until retirement age. But perhaps you want to help them out in the shorter term. What if you want to set something up for early adulthood, perhaps to help with university fees?
For university, the job's always a good ‘un with a Junior Isa or ‘Jisa'. The Junior ISA is also opened by a person who has parental responsibility. This person will be known as the ‘registered contact' and be responsible for managing the account, but again, anyone can contribute. This year you and the relations can put up to £4,368 into the Jisa, which your child can access just in time for Fresher's Week when they turn 18.
Those are two great ways of saving for your child, helping them on the ladder to success. But what happens if you – who are already on that ladder – fall off it and break your leg? Or even worse?
Part of realistic planning for our children is contemplating the prospect of sudden disability or serious illness.
If, you are unexpectedly taken out of your work by a heart attack, a stroke, or cancer, how would the loss of your income affect your plans for caring for your child? Between school uniforms, school trips, piano and guitar lessons, and when only the big-name brand tracksuit will do, you would want to be taking on an extra job, rather than losing the one you've got.
The answer is to insure your health with critical illness insurance (CI), which pays a once-off tax-free amount, or take out income protection insurance, which gives you a monthly payment to replace your income. These can ensure you're not left scraping for cash, at a time when you'll already have severe ill-health to deal with.
In reality, we are not very well prepared for these situations. Legal and General tell us that 30 per cent of UK workers don't have any financial back-up plans to deal with long-term illness, disability or other loss of salary. The average person has enough saved to last just 32 days, if their income stopped. And yet, only 10 per cent of us have secured our peace of mind, and our family's security, with one of these great products.
However, there is also the dreadful prospect that it's our child who might become seriously ill. Here's another little-known fact: many of the critical illness insurances you could take out on yourself also include protection for the health of your child, at no extra cost.
If your child – god forbid – was hit by a serious illness, CI could enable you to stop work, or take time out to give them the valuable home care they need. It could also help with modifying your home, for instance if wheelchair access were suddenly needed.
Here are some of the benefits for you and your child, taking Legal and General's policy as one example. The policy pays out if your child is diagnosed with one of a list of specified critical illnesses, a payout of 50 per cent of your own sum assured, up to a maximum of £30,000. Separately, if your child has an accident, you could receive £5,000 if they have to spend 28 days or more in hospital. None of us likes thinking about harm coming to our children, but at least you'd have peace of mind knowing that they could have the personal care of a loving parent at home, if it did.
Well, these are just a few of the ways to build a ‘financial safety net' to make sure your children are protected, no matter what. Whether in the early years, or through school, at university, or even in old age, you can complement taking care of them from day to day by making them financially secure as well!
:: Michael Kennedy and Shaun Doherty are independent financial advisers and pensions specialists, and can be contacted on 028 71886005. Further information is available on the Facebook page 'Kennedy Independent Financial Advice Ltd' or the website www.mkennedyfinancial.com