Seeding Change

Finding Balance

Growth

Introduction

There are a lot of changes that can take place in your Growth phase – switching your career, raising a family and finding the right work / life balance.

With work and family at the forefront, your personal financial situation can sometimes take a back seat. From navigating which parental benefits you may be entitled to, switching to part-time hours, amending your budget or saving a little bit for your children’s future, the list can feel very overwhelming.

In this guide, we’ll look at various areas to think about in your Growth stage, with guidance on some of the more technical financial planning considerations to help you find the right balance.

Maternity Leave

In the UK, individuals are legally entitled to 52 weeks of statutory maternity leave. It is separated into two parts – Ordinary Maternity Leave, within the first 26 weeks, and Additional Maternity Leave for the remainder.

You do not have to take the full year of Maternity Leave, but you must take 2 weeks’ leave after your baby is born.

While Maternity Leave entitlement is 52 weeks, Statutory Maternity Pay is limited to 39 weeks, with 90% of your eligible average weekly earnings paid for the first 6 weeks, and £151.97 or 90% of your average weekly earnings (whichever is lower) for the next 33 weeks.

Company-paid maternity leave above the statutory minimum is not available for everybody – although a recent poll[1] found that almost two-thirds of UK businesses now offer some kind of enhanced maternity leave as part of their benefits packages to help attract and retain valuable individuals in the workplace.

Shared Parental Leave, a blending of both maternity and paternity leave has also been available since 2015.

Being frank about figures, £151.97 per week (£7,902.44 per year) is not a huge amount of income, particularly with the increased household expenditure that naturally comes with a new arrival. A sudden reliance on only one partner’s income can also come as a shock.

We can’t always plan for everything, and even small miracles are sometimes unexpected!

But careful budgeting, cash flow planning, a sufficient emergency fund and properly stress testing your existing savings can go a long way to ensuring that your time off is spent on the most important things.

Benefits

There are a number of benefits and financial support you can claim as a new parent, including Child Benefit, Child Tax Credits, Maternity and Adoption Leave and Pay, plus a number of other financial options to help if you need support with childcare, support as a student and support if your child has a disability.

Some benefits will be means-tested – for example, Child Tax Credit can only be claimed if you are already in receipt of Working Tax Credits. Child Benefit, on the other hand, is not means-tested but does have some circumstantial conditions that may affect your eligibility.

Income received from your savings and investments can affect how much you will receive from your tax credits. In addition, there are certain savings thresholds that may impact on other benefits such as Universal Credit.

At Path we’ll always establish early on any potential impact that your investments may have on the benefits you may be entitled to.

High Income Child Benefit Charge

The High-Income Child Benefit Charge applies if you or your partner has an income over £50,000. The tax charge applies at the end of each tax year and is applied to whomever is the higher earner.

Finding out if the High-Income Child Benefit Charge applies involves calculating your ‘adjusted net income’ – your total taxable income before any personal allowances of Gift Aid.

An important part of planning in your personal finances is taking account of any investment incomes that may push you over this threshold. Careful encashment of investments needs to be considered, as does your personal circumstances before and after the end of the tax year.

The Marriage Allowance

Taking time out to concentrate on your family may involve a reduction in your household income, so a little extra help is always welcome.

In some cases, even with statutory maternity pay, the Marriage Allowance can also be claimed, if your earnings are below your Personal Allowance, and your partner pays basic rate income tax.

The Marriage Allowance will let you transfer £1,260 of your Personal Allowance to your partner, reducing their tax by up to £252 in the tax year and giving your household income a small boost.

The Marriage Allowance can also be backdated to include any years that you both were eligible from 5 April 2017. It is also a valuable allowance to claim if one of you chooses to be a stay-at-home parent and the other remains a basic rate taxpayer.

Unfortunately, this allowance only applies to individuals who are married or in a civil partnership, and not those who are living together only.

Pension planning while you are not working

If you have left the workplace – temporarily or permanently – continuing to fund your pension arrangement is vital.

In the UK, there is a large disparity between the values of personal pensions for men and women. In 2019, this gap was larger than the gender pay gap, at 37.9%[2]. The gap exists for a number of reasons – it is women who are most likely to reduce their working hours, or cease working altogether, to concentrate on raising a young family, in addition to the existing gender pay gap and previous state pension inequality.

The good news is that pension contributions under auto-enrolment continue while you are receiving Statutory Maternity Pay and if your employer already matches your contribution, they will continue to do so throughout your leave. However, pension contributions during this period will be dependent on your actual earnings – so you may find that you are contributing at a much lower level than you were prior to your leave.

It is important to remember that your auto-enrolment contributions will only be paid for the Statutory Maternity Pay period. The final 13-week period is treated as Unpaid Leave, and therefore would not qualify for pension contributions under the auto-enrolment system.

It may also be the case that you have decided to leave the workplace permanently, perhaps as a stay-at-home parent or to concentrate on more meaningful pursuits and your young family.

Pension contributions are limited to 100% of your relevant earnings each year but this doesn’t mean you cannot contribute at all while you are not working. As a non-taxpayer, you can contribute a maximum of £2,880 net (£3,600 gross) to a personal pension each tax year to boost your retirement savings in the longer term.

Returning to work

Returning to work, in any stage of your life, is a daunting proposition, particularly if you have been out of the workplace for some time.

A lot of us return to work gradually after having children, suffering from illness or taking a career break. Returning on a part-time basis can help provide balance, such as increasing your financial independence while also ensuring quality time with your family and lowering childcare costs.

If you return part-time, you can still join your company workplace pension scheme, and you will be automatically enrolled if you meet the minimum eligibility criteria. Even if you are outside the auto-enrolment age limits or below the earnings trigger, you can opt in if you choose to.

If your earnings are low, your pension contributions may feel too minimal to make a difference. But investing over a long period of time, and with the benefit of compounding, small pension contributions can grow into significant savings by the time you come to retire in later life.

If you return to work on a flexible basis, your employer will automatically enrol you into a pension scheme the first time your earnings pass the auto-enrolment threshold. These contributions will continue while you remain eligible but remember that they may also cease if your earnings fall below the minimum amount, depending on the rules of your workplace pension scheme.

Auto-enrolment rules don’t apply to those of us that are self-employed, and it is up to you to consider saving for your retirement. Remember, a little bit goes a long way, so if you can afford to make personal contributions, it is definitely worth putting aside a little each month if you can.

Family protection

The Growth stage of your life comes with a lot of things to protect – your mortgage, your income, and your family in the long-term.

Sickness and illness can strike at any time. Statutory Sick Pay is currently £96.35 per week, and your employer will pay this for up to 28 weeks.

Most of us, particularly those of us with younger children, will spend much more than this in an average week. Protecting your income is an important consideration and can be easily facilitated with a robust Income Protection policy, that can pay you a replacement income should you fall ill and need to take time off work. More importantly, this income can be higher than Statutory Sick Pay, allowing you breathing space to pay your essential bills while you concentrate on getting better.

In some cases, we may be critically ill, or more sadly, pass away early, leaving our family in a vulnerable position. Life insurance can be vital in clearing any outstanding mortgage liabilities or debts, or simply leaving a lump sum to help take care of your loved ones after you have gone.

Specialist policies, such as Family Income Benefit, can pay a regular income to your family after your death, to help with school fees, childcare and support rather than a large lump sum that needs to last until your children are financially independent.

Writing your policy into trust can help ring-fence your insurance pay out from any lurking inheritance tax, ensuring that your loved ones are free of further financial worry and giving you the option to decide who you wish to look after funds for your children in future.

Saving for your children’s future

While we mostly concentrate on our future selves during our Growth stage, looking out for our children also becomes a priority. Whether it’s saving for future school fees, help with university costs, house deposits or a wedding, we would all like to be in a position to help out as our children begin finding their own financial independence.

Children’s savings accounts usually offer a fairly generous interest rate in comparison to accounts available for parents, and NS&I Premium Bonds offer an alternative option if you have a larger lump sum to invest. Grandparents can also purchase Premium Bonds for grandchildren, unlike savings accounts that may be restricted to parents only.

Junior ISAs are an excellent – and tax-efficient – method of saving for our children, benefitting from tax-free growth and income much like a regular ISA with the possibility of achieving a higher level of growth than saving accounts alone. Currently, you can contribute up to £9,000 per annum per child to a Junior ISA.

But be aware – Junior ISAs will automatically convert to an ISA when your child turns 18. Unrestricted access to a large lump sum may not be the best outcome for everyone!

At Path, we can help you explore alternative investment options that allow you to keep control and ensure your children get the help they need when the time is right.

[1] https://www.xperthr.co.uk/survey-analysis/maternity-leave-and-pay-xperthr-survey-2021/165964/
[2] https://prospect.org.uk/article/what-is-the-gender-pension-gap/