Expecting? Forget the baby gear, start saving

A new baby can severely dent your wallet, so it is vital to plan your finances before the day arrives, says Gaynor Pengelly
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The Independent Online

Discovering you are about to become a parent can be one of the happiest times of your life. It is enough to send you on a wild spending spree for baby clothes, toys and nursery equipment. But spending madly on baby luxuries can have a disastrous impact on your finances.

Discovering you are about to become a parent can be one of the happiest times of your life. It is enough to send you on a wild spending spree for baby clothes, toys and nursery equipment. But spending madly on baby luxuries can have a disastrous impact on your finances.

"Once you have decided to have a baby, you need to start reining yourself in financially straightaway," says Kerry Nelson of the independent financial adviser Willis Owen. "It's very tempting to fill the house with beautiful baby gear, but it is more important than ever to have savings to fall back on when you are going to have to manage on just one salary. It pays to save some cash to tide you over while you are off work, and it's vital to sort out your finances so you are able to manage and make the most of your time with your new baby."

Small adjustments to your finances such as transferring to a credit card with a low interest rate and switching your bank account to one paying a more attractive rate of interest will help boost your coffers.

Internet banks offer some of the best rates and current account packages, so go online to check out the most competitive deals. Impending parenthood is also a good time to consider a new mortgage. When you go on maternity leave your income will drop substantially, particularly during the last weeks. There are a number of new flexible deals on the market that allow you to overpay some months so you can underpay during others.

Before you take the step of switching home loans, check to make sure you will not incur a penalty on your existing loan. These usually apply to fixed or discount deals.

It is important to ensure that, if anything happens to you or your partner, your child is properly protected and provided for. If you do not already have life assurance or health cover you should take some out for the sake of your child, and your own peace of mind.

Healthcare cash plans operated by more than a dozen companies, including HAS Healthcare and Bupa, typically pay a cash sum on the birth of each child, as well as extra cash if nights have to be spent in hospital.

"Women trying to conceive or in the early stages of pregnancy should look at getting life assurance cover as soon as possible," says Philippa Gee, investment strategist at the financial adviser Torquil Clark. "Women who have straightforward pregnancies will have few problems getting protection, but those who incur complications, and then seek life cover, are likely to find insurance providers won't protect them until after their child is born."

Dr William Morgan, medical adviser to the insurance provider Liverpool Victoria, says: "It wasn't that long ago that insurers would not insure the lives of pregnant women, but companies are far more flexible now. But we are seeing a generation of high-risk mothers who are more likely to face complications, or women who have IVF and are likely to have multiple births, increasing the risk of severe pre-eclampsia. It is such an avoidable difficulty for women, if they sort their life cover out prior to or early into pregnancy."

Ms Gee says: "Minor ailments during pregnancy are unlikely to concern insurance underwriters, but there are a number of situations such as high blood pressure, diabetes, toxaemia and hypertension, which can affect pregnant women unexpectedly and which underwriters will consider a risk."

More than 285,000 working mothers claim statutory maternity pay each year, and qualify for the benefit if they have worked at least six months for an employer. You must tell your employer at least four weeks before you intend to stop work.

Statutory Maternity Pay (SMP) is paid for 26 weeks. For the first six weeks women receive 90 per cent of their take-home pay, followed by maternity pay of £100 (or 90 per cent of average weekly earnings if this is less) for the remaining 20 weeks. You will need to provide medical evidence of when your baby is due. Medical evidence should be on form MATB1, signed by your doctor or midwife. When you get your certificate, give it to your employer.

Fathers are also entitled to two weeks' State Paternity Pay (SPP) at £100 a week. You must notify your employer by the 15th week before the baby is due that you wish to claim SPP and state when you would like it to begin. You will be expected to complete a self-certificate to confirm that you meet the qualifying conditions.

If you cannot claim SMP, but have recently been employed or self-employed, you may be entitled to Maternity Allowance at £100 per week.

Working mothers who are members of a company pension scheme will normally find their pension rights are fully protected while they take a maternity break.

If you are in a final salary scheme, you continue to make reduced contributions to your pension fund based on your maternity pay. Your employer will make up the difference and pay its normal contributions based on your usual salary.

If your pension scheme is a money purchase scheme, again you will make reduced contributions based on your maternity pay while your employer will continue to contribute based on your usual salary. In this case your employer is unlikely to make up contributions.

"When you return to work, you can usually make additional voluntary contributions to your pension to ensure your final fund is not reduced by your baby break," says James Jones-Tinsley of the national adviser Bates. "In the past, women on career breaks could not continue to pay into their pension. However, this changed when the stakeholder pension was introduced. Women can now continue contributions based on their salary for up to five years after they stop work. After this they can continue to contribute up to £3,600 a year gross."

Most new personal pension plans are designed to allow women to take a contribution holiday, but if you take an extended break it will have a huge impact on your retirement fund. And "old-style" personal pensions will usually hit you with penalties for taking payment breaks.

If you are just taking the statutory maternity leave, the impact on the pension fund should be much less and you will probably just need to step up contributions for a short while to catch up.

The Chancellor, Gordon Brown, himself a new father, is keen to give Britain's babies a good start in life by putting aside at least £250 of government money in the Child Trust Fund for every baby born since 1 September 2002. Families on a low income will be given £500 and every household can then pay up to £1,200 extra each year to provide an even bigger tax-free nest egg for their children at 18. For further details call 0845 300 3900.

It costs around £106,000 - the price of an average house - to raise a child to the age of 18. That dwarfs the weekly child benefit of £16.05 per week for a first child and £10.75 per week for any further children.

Child care can seriously damage your wallet. Expect to pay between £90 and £140 per week for a full-time place in a childminding service, and discuss holidays and other terms and conditions. Always ensure a childminder is registered with Ofsted and has public liability insurance and a current first aid certificate.

If the convenience and flexibility of someone coming to your home and fitting around your working hours is a top priority, consider a nanny.

As the nanny's employer, you must pay their tax and national insurance as well as wages ranging from £150 to £500 a week. For further details call 0845 607 0143.

Day nurseries cost around £100 and £170 a week, and three and four-year-olds are eligible for a reduction in fees.

Each year thousands of families fail to take advantage of financial help towards child care because they don't know what is available or do not realise they are eligible. For further details call ChildcareLink on 0800 096 0296.

Give yourself a safety net of at least 10 per cent of your income each month, to allow for unexpected additional expenses. Ideally you should have savings of at least three times your monthly income for absolute dire emergencies. If your income is set to dip below the level required, you must save extra to compensate for that. Even an additional £50 a month throughout your pregnancy would produce £450 plus interest.

'We sold our car for a baby buggy'

The last two years have been a whirlwind for Alistair Wooster and Sally Westbury. In 2002 Ms Westbury, then 40, gave birth to their first son, Freddy, who was joined recently by Oliver. The couple, from east London, are still reeling from the shock and excitement of expanding their family so rapidly.

"It's been a thrilling 24 months," says Mr Wooster, 31, a business manager. "While we miss the spontaneity of our childless years, there have been plenty of rewards. Having young children has meant we stay in more, which is good because they certainly have an impact on your wallet."

Ms Westbury has quit her job as a TV production manager to stay at home and raise their sons, so the family now lives off one income. "It wasn't a decision taken lightly," says Mr Wooster, "but when we discovered the price of nursery care, about £500 a week, it didn't make financial sense for Sally to continue working."

The couple have saved by accepting baby hand-me-downs from relatives. "We were quite shocked at the cost of nursery equipment," says Mr Wooster. "Sally sold her second-hand car and it made barely enough more to cover the cost of a double buggy."

The couple have opened a Nationwide children's account and encourage grandparents to give money rather than expensive toys. Freddy and Oliver can expect to receive £250 each from the Child Tax Fund, and the weekly child benefit of £26.80 goes into the children's saving accounts.

FACT FILE

* CASH INDIVIDUAL SAVINGS ACCOUNTS

Up to £3,000 a year can be invested for a child in a tax-free cash ISA. But interest rates are relatively low.

* BANK OR BUILDING SOCIETY SAVINGS

The most popular way to save for children. Some banks promote special accounts for children. Your capital is protected, but as interest rates are historically low, it won't grow very quickly.

* NATIONAL SAVINGS CHILDREN'S BONUS BONDS

National Savings & Investments is a government agency which offers savings and investment products. There is a maximum you can invest in each bond "issue". Each issue has a fixed rate of return for five years with a bonus paid at the end of the period. You can renew the bond for a five-year term. The interest and bonuses are paid tax-free. The final bonus will be paid on the holder's 21st birthday and interest will be paid tax free until they are 21. The bond is available to under 16s.

* COLLECTIVE INVESTMENTS

Collective investments pool your money with other investors in a spread of up to 200 stocks. This allows you to invest in the stock markets you choose, without having to make day-to-day investment decisions yourself. The investment is managed by fund managers. Can be held within a stocks and shares tax-free ISA.

* PENSIONS

You can invest £3,600 each year into a stakeholder pension scheme, though you only pay in £2,808 as the Government provides the rest to the pension provider in tax relief. The pension will be in your child's name, though you take responsibility until the child is 18.

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