Providing for your children's future

Many parents start a family when their income is low. Despite that, a new set of responsibilities is taken on almost overnight, says Andy Couchman
The birth or adoption of a first child is an event that every parent looks forward to with a sense of excitement and fear. New parents take on enormous responsibility for the life of a little human being. That is balanced though by moments of great excitement at junior's first step, word or smile. In the event, bringing up children is often much harder work than we expect, but despite that few parents would have it any other way.

The one exception to that rule is finance. Many parents start a family when their income is still low, the mortgage enormous and investment capital small. Despite that, almost overnight, a new set of financial responsibilities has been taken on.

When planning how best to manage the situation, the first priority should be protection. Most people will have life cover, usually up to four times their income, as part of their pension and that is always the best place to start because premiums can be offset against tax. The downside is that if you change or lose your job, the life cover goes too.

Derek Brown of independent financial advisers Warwick Butchart and Associates in Cheltenham recommends family income benefit for many young families. This provides an annual income in the event of death. In the past such cover was often written to the child's 18th or 20th birthday. Now, with one in three school leavers going on to further education, a longer term, perhaps to age 25, is more popular.

As the cover is in effect decreasing as you get older, it can be very cheap. GA Life would charge a 30-year-old man pounds 13.18 a month for cover of pounds 10,000 a year for 25 years. If he died in the first year, the insurer would pay out a total of pounds 250,000. If he died after 10 years, the total would have fallen to pounds 150,000. How much cover do you need? Four times your income is usually a minimum, but the way to calculate it is to work out how much you would need to pay off any capital commitments such as mortgages and loans, then work out how much income your surviving family would need to live on and for how long.

The need for life cover falls away as dependent children grow up and are no longer financially dependent, but your surviving partner will still need to live and estate planning may then be important, too. Generally, however, beware of any adviser who argues that you need enough life cover to provide an inflation-linked income in perpetuity. As financial commitments fall away in the future, so does the need for life cover.

Even if one parent is not working, consider life cover on both, together with critical illness cover to give a lump sum on suffering a life-threatening illness, and income protection to get a monthly income in the event of long-term illness or disability. Many critical illness plans now include free cover for dependent children of up to pounds 15,000 or half the sum assured if less.

Savings are particularly important for a child's future education. At one time only school fees planning was considered. Now student loans and tuition fees mean that many are likely to leave further education in debt. Building up savings for them can help minimise the size of their eventual debt. Often grandparents and other relatives welcome the opportunity to help youngsters save for the future, especially if the money is to be used for their education.

School fees cost, on average, about pounds 4,000 a year for boarders and pounds 1,700 for day pupils. Planning to pay those fees is best started before the child is born in order to give the longest possible time for the investment to build up. Many parents only start to think seriously about it when their child already has his or her name down at a first school.

Generally if there are less than five years to go, invest as much as you can afford in deposit savings. Longer term, TESSAs, PEPs and unit trust savings plans are likely to prove better. Endowment assurance-linked schemes may give advantages to higher-rate taxpayers but often at the expense of flexibility.

Fiona Price, of Fiona Price and Partners, warns against pre-packaged school fees investments. "The problem with many packages," she says, "is that they can prove to be inflexible and quite expensive. It is usually best to choose from what's available in the market. That way it will meet your needs and you can get best value for money."

Some independent schools run charitable trusts, which can give income tax benefits, but these are best considered only if the child will definitely attend that school. "If you are considering school fees planning, make sure you have sufficient protection cover, too," Ms Price warns. "Many parents overlook the fact that if they are no longer alive there may be no one to continue paying the school fees."

When children are young, parents often have to face sacrifices as well as getting accustomed to a whole new way of life. With careful planning, they can do so with peace of mind that the family is protected against the worst eventualities while savings are being built up to help the children as they get older.

Andy Couchman is publishing editor of HealthCare Insurance Report


Fiona Price & Partners on 0171-430 0366

Warwick Butchart & Associates on 01242-237155

General Accident Life

on 0500 100 200

For a list of independent financial advisers near you call IFA Portfolio on 0117-971 1177.