How to be a full-time parent with a full-time pension

Posted on May 5th, 2017 | Categories - Pensions

Imagine working 168 hours a week with no lunch breaks and very little holiday. It should, in theory, mean that you can retire early and comfortably, right? Unfortunately, for the many stay-at-home parents in the UK, this simply isn’t the case.

Research shows that full-time mothers and fathers are among those least likely to save for their retirement, leaving them exposed to financial hardship in the future.

According to the founder of MummyMoneyMatters.com, Kalpana Fitzpatrick: “Stay-at-home mums are at the highest risk. Saving for retirement is simply not on the agenda, because they have no income.”

Although the number has fallen over the past 25 years, the Office for National Statistics (ONS) reports that around 10% of families still have a stay-at-home parent. So how can they ensure that they get a decent pension when the time comes to retire? The basic State Pension currently pays out an annual income of around £8,000 providing you have paid National Insurance Contributions (NICs) for 35 years. If that doesn’t sound like enough to afford the lifestyle you’d like in retirement, there are a few things the full-time parent can do to keep their pension growing at a steady pace.

1. Workplace Pensions

A workplace pension can be a powerful way to save money for retirement. Not only do you put money away, but your employer pays into it, and in some cases you get tax relief from the Government as well.

If you are an employee who becomes a parent, then it may well be worth maintaining your pension contributions as your employer will continue to make theirs for the duration of your maternity or paternity leave. This could mean an additional 39 weeks of pension payments.

2. Lifetime ISA

If you no longer have an income and you are not enrolled in a workplace pension, then two other options are available to continue receiving tax relief:

• Paying into a private pension (more about this later)
• Opening a Lifetime ISA (LISA) providing you fit the requirements

A LISA can be opened by anybody aged 18-39, and provides an alternative to a pension. The basic features are:

• It is a savings and investment product for 18-50 year olds (only under 40s can open one)
• A maximum of £4,000 can be paid in per year (which will be taken out of your annual ISA allowance of £20,000)
• The Government will add a 25% bonus on any money saved
• It’s available in both a Cash and Stocks & Shares format
• It can only be used to buy a first home worth less than £450,000, or after the age of 60 without incurring penalties

Richard Parkin, head of pensions policy at Fidelity International, comments: “For those who don’t have access to support from an employer, we think the Lifetime ISA offers a much better return than saving in a pension.”

Any money saved into a LISA will get boosted by a 25% bonus from the Government, which compares with the 25% tax relief that basic-rate taxpayers receive in a pension. The main difference lies with how the money is taxed when it is accessed. Because a LISA carries the same tax wrapper as an ISA, it will not be taxable when any withdrawals are made. Whereas a pension, any money taken above the 25% tax-free lump sum limit is taxable.

3. Make hay while the sun shines

The average age that British women give birth has been rising steadily since the 1970s, according to the ONS. With the average age currently at 29.8 years old, women are having children much later on in life than previous generations. This could provide valuable time to earn an income and pay into a pension before becoming a stay-at-home parent.

As with many areas of personal finance, prevention is far more effective than a cure. It isn’t always possible to plan ahead when having children, but preparing for your retirement as early as possible will do your pension the world of good. Young workers often put off setting up a pension as they think that retirement is too far away to worry about. A moment or two to set up a pension now, and the discipline to make payments each month, can be the difference between a comfortable retirement and having to work long past retirement age.

4. Fill as many gaps as possible

If you have missed your chance to pay NICs before having children, then making voluntary contributions will fill any gaps retrospectively. Richard Parkin comments: “When you’re topping up, you’re buying an inflation-linked pension, and that costs an absolute fortune to buy from an insurance company. The more you put in, and the sooner you put it in, the less you’ll need overall. It is always worth it, because otherwise you’re not going to have anything to live on in retirement.”

Even if you are away from the workplace you can build up NIC credits. As long as you are registered for child benefit, and your youngest child is under the age of 12, you’ll get credits for the time at home.

5. Use your partner’s income to pay into a pension

One of the main reasons that full-time parents don’t pay into a pension is because they simply don’t have an income. A solution to this could be having a partner pay into a pension from the household income, providing of course that they can afford to do so.

Having a partner pay into a private pension such as a:

• Stakeholder pension
• Personal pension
• Self- invested personal pension (SIPP)

Could provide you with a much needed boost when you reach retirement age. There are tax incentives to do this as well, which would see a contribution of £2,880 get topped up to £3,600 by the Government. Deciding whose pension to contribute into is a complex decision, and you need to consider the level of tax relief available now for each of you, and your likely tax rate in retirement before deciding exactly how much to pay into each pension.

Being a parent gives you enough to handle without worrying about pensions and retirement as well. That being said, you are going to retire eventually (although it may never seem like it), and when the time comes, prior planning will be worth far more than the time and effort it takes to put everything in place. If you are in any doubt as to the best pension options for a full-time or part-time parent, then advice from a professional will be able to put you on the straight and narrow.