Make sure your kids aren’t jeopardising your retirement

Raising a family often puts household finances under pressure, but there are things you can do to mitigate the impact on your retirement income.

Nobody needs to be told that starting a family is expensive. You’ll no doubt be prepared for all the costs that come with those early years, from childcare bills to all the kit and caboodle. You might – very sensibly – also be planning ahead and setting up Junior ISAs or thinking about how you’ll pay school or university fees.

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But, in amidst the nappies and the night feeds, most parents don’t stop to think about the impact children will have on their household’s retirement income.

The gender pensions gap affects everyone

While the gender pay gap is narrowing, the gender pension gap remains a genuine concern, not just for women but also for couples’ combined finances.

According to the first official gender pension gap report from the DWP, by the age of 55 (the age at which you can currently start accessing your private pension savings), men have around 35% more saved than women (excluding those that don’t have a pension).

The gap – it found – is at its narrowest for women in their 30s but is at its peak for women in their 40s, falling back at older ages.

The reasons for this gap are numerous. Women are more likely to take time off work to raise a family – and pay less into their retirement pots as a result. And when women do return to work, it may well be on a part-time basis or in a lower-paid job.

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Going beyond children, women in middle age are also more likely to take time out of work to care for ageing family members, reducing their ability to maintain pension contributions.

This whole process kicks off when children come along. So while pensions might not be at the front of your mind when you or your partner goes on maternity leave, neglecting it altogether could be a costly mistake for you both.

Find out what happens to pension contributions on maternity leave

It doesn’t take much effort, but it’s important to find out how much money will be paid into you or your partner’s pension during the maternity leave period.

While pension contributions will continue, the chances are that they will be at a lower rate. For women on statutory maternity pay (SMP), employer contributions will be maintained at their prior level and will not drop. However, women’s own personal contributions will carry on being a fixed percentage of their actual earnings during that time, so will fall considerably in real terms. 

Some women will get an enhanced maternity pay package from their employer in which case they may not see their contributions drop to such a significant degree.

It’s also worth noting that, irrespective of the pay package, if contributions are made by salary sacrifice, 100% of a woman’s pension contribution will be regarded as an employer contribution. This quirk means the woman’s total pension contribution will remain at its pre-maternity leave level, even if her own income drops.

Keeping on top of pension contributions

Even if your mind is elsewhere during the early years of parenthood, it’s important you don’t let your pension slip. If you can afford to, it’s a good idea for women to top up their pension contribution so it doesn’t drop on maternity leave and prioritise pensions if you go back to work. In many cases, employers will match your pension contributions, meaning the more you pay in, the more they pay in too.

And unless you have no other options, you should never stop pension contributions altogether.

Laura Myers, a partner at pensions consultancy LCP says: “It’s important to remember the miracle of compound interest. Rather than try to make up a pension shortfall later in life, keeping contributions up even when out of the labour market or working part-time keeps up the momentum of pension saving.”

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And, where women cannot afford to pay into their pension, their partner can contribute instead. Myers explains: “In most cases pension contributions can be made on behalf of the partner doing more child raising by the higher earner in the couple, subject to the usual tax limits. So, for example, a partner who has continued to work can pay into the pension of the mum, and she will benefit from tax relief on his contributions.”

She adds: “Couples should also make sure that household costs such as childcare bills are seen as a joint responsibility and don’t fall disproportionately on one person, leaving them with little disposable income to pay into pensions.”

Where a mum decides to stop working, it’s also worth knowing that their partner can still pay up to £2,880 into a pension for them each year, which will be worth £3,600 once basic-rate tax relief has been applied.

One argument against paying into a partner’s pension might be that the higher earner is paying enough for two into their own pot. But Myers points out that it is vital for women to have their own pension. “Relationships do change and they cannot be certain that they will be able to rely on the income of their current partner in 20 to 30 years' time.”

Pensions can be split in the event of divorce, but it’s tricky. Problems can be avoided by making sure both people in a marriage have their own retirement provision.

Don’t forget about your state pension either

If you or your partner is taking an extended period of time out of work, it’s also important to think about your National Insurance contributions (NICs). To get a full state pension, you’ll need 35 years’ worth, but you don’t necessarily have to be working to build your entitlement.

When you take time out of work to raise a family you should be eligible for National Insurance credits, but to get them you need to claim child benefit.

However, a problem that has emerged in recent years is that many families don’t claim it, because their earnings mean they’ll have to pay the money back through the ‘high income child benefit charge’.

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Myers explains: “Couples where one parent earns more than £60,000 may take the view that there's no point one of them getting child benefit when the other will get a tax bill of an equal amount. But this misses the fact that child benefit brings with it automatic entitlement to National Insurance credits which help to protect your state pension. “

“Parents who don't want to receive the cash benefit (and associated tax bill) can tick a box just to receive NI credits. Unfortunately, many tens of thousands of parents have failed to do this since the charge was introduced in 2013.”

The government recently indicated that it will try to rectify this problem, but no solutions have been proposed yet. In the meantime, it makes sense for affected women to sign up for child benefit, if only for the credits.