Getting your finances in order

You've gone through labour and come out the other side with a gurgling bundle of wonder. The champagne is on ice, the flowers are piling up in your living room, and apart from permanent exhaustion all's well with the world. Hopefully the last thing on your mind is money yet all the experts say now is the time to take a long hard look at your finances. Being a parent means you can no longer remain blissfully oblivious to all that frightfully boring stuff like wills, pensions and insurance. Or can you? Below, we've rounded up the things to think about (and the things not to bother with) once you've caught your breath.

Insurance
In an ideal world you would take out every single type of insurance cover and would never need any of it. Statistically there will be some of us who need the lot, but the chances are it won't be you. So don't get too depressed if you cannot afford to cover yourself for everything, more than likely you won't need to.

Life Assurance
Most financial advisors agree that if there's one time to take out life insurance it is when you have kids. You and your partner might be lucky and be covered by a scheme run by your employers, but if one of you is giving up work to care for your child, then obviously that person will no longer be covered. If you have a mortgage, the chances are you had to take out cover for the outstanding amount in the event of your death, so the house at least will be paid for. But running costs and day to day living are another matter. Make sure your mortgage will be paid off in the event of your, or your partner's death, and then calculate what kind of lump sum payment you could manage to live on if one of you were left to raise the children alone.

A joint lives policy for a 20-year term, if both of you are early 30's and don't smoke, could cost you as little as £30 per month to assure a lump sum of £235,000. The catch is that you only get the money if one of you dies, but you can take out more expensive policies which also build up a sum to be paid at the end of the term. Few of us can insure ourselves to provide an income for life, but it is affordable to provide a sum that will tide you, or the carer of your children, over for the first few months after a death.

Verdict?
If you change one thing about your finances, this is the one. You need life insurance cover.

Permanent Health Insurance or Income Protection
Looking on the bright side, at least if you die, then there is one less mouth to feed. If you or your partner simply become too ill to work, then you will not just have to cope with the lack of income, you have the added cost of caring for the sick party as well. Cheery stuff this, not helped by the fact that income protection plans are pretty expensive. Most aim to pay you a percentage (half, two thirds etc.) of your salary in the event of serious illness (check the policy carefully to see what exactly is covered). If you are employed, work schemes may be provided. If however, you are self-employed or a short term contract worker, you should consider whether you can afford this type of cover. Only around 9.3% of the working population have it, if that makes you feel better.

Verdict?
Expensive, but if you can afford it, worthwhile.

Critical illness
Differs from the above in that it simply pays out a lump sum if you succumb to one of the nasties listed on the policy - cancer and heart disease being the most commonly cited. Lump sums vary. It aims to provide a 'cushion' at a difficult time for the family.

Verdict?
Less important than PHI. Helpful rather than essential.

Medical Insurance
We all know about this one. Whether you take it out now will depend on your experience of the NHS and your politics, as well as your bank balance. What you should do is look carefully at the cover provided, and the speed of response to policyholders. The cover may sound great but if it takes an age to pay up, it is of no great use. According to The Independent money magazine, the cheapest comprehensive medical insurance policy for parents aged 35 with 2 children is currently from Permanent Health at £87.36 per month, and the lowest cost budget cover costs £44.09 per month from Legal and General.

Verdict?
Probably not at the top of your list right now.

Holiday Insurance
Here is the good news. If you can still afford to go abroad more than once a year, annual insurance policies for families are cheaper than taking out individual policies each time. This is probably even true if you don't have children. If you have the energy to include skiing in your itinerary, and require worldwide cover for the rest of your holidays, policies for a family of 4 range from £90 to £200 per year. European cover only is less. Don't forget that form E111 and a Green card provide medical and motor insurance respectively in many European countries (forms available from your post office). They are free/ around £10 respectively.

Verdict?
Get that annual family cover now, and spend a boring 20 minutes to fill out the forms at the GPO.

Pensions
Surprise, surprise, it turns out we should all have been paying into a pension fund since our first paper round and should have raised our contributions to the maximum allowable at each age. If you're one of the few who's done that, go get a life. If you're not, read on.

If you have stopped working you should consider two things:
First, until the arrival of the new stakeholder pension next year, you can only invest a percentage of earned income in a pension. Thus if you had set up a monthly payment into a private pension fund, be careful that you are not going over the limit. There are mechanisms for back payment of pensions, to allow you to use up previous years allowances (assuming you have not paid up to the hilt each year) but you should check what your allowance is.

Back payment does not mean that you should ignore pensions when you stop working. Even a gap of 6 months payment can lead to a loss of several thousand once your pension is drawn. If you have any money spare, you should consider investing what would have gone on pensions into ISAs or other forms of investment. ISAs have the advantage of being tax free on payment (although, unlike pensions, the monthly payments are not tax deductible). Talk to your financial advisor.

Verdict?
If your income is reduced or nil, you will be struggling to find anything to spare. But if you can manage to invest something (anything), use up all your pension allowance, including back payments, and invest the rest in alternative funds (ideally hanging onto them for retirement).

Saving for your children
Let's forget about illness and death. On the assumption that you all live your allotted span, what you are really going to need is some extra cash for those hidden and not so hidden expenses. Given the latest plans to charge tuition fees at University, the chances are that by the time your little Einstein packs his or her bags, you will be footing the entire bill. What's the best way to prepare?

Baby bonds
No doubt you have been inundated with fliers for various bonds. They look tempting because they are for such affordable amounts - the maximum you can invest in a friendly society baby bond is £25 per month or £270 per year. But are you better off simply sticking the child benefit in a building society? Look carefully at the charges. A good performance of 7-8% might be brought down to 3 or 4% once charges have been deducted. Bearing in mind that you can currently get 6% (albeit not tax free) in various supermarket or online accounts, this is not the great deal you might have thought. However, if you pay the premiums for the full term (minimum is usually 10 years, maximum 30 years) the savings build up tax free and give a tax free payout at maturity.

Verdict?
Look at the charges, but if you can find a good one and you're confident of meeting the premiums over the full term, it's an easy way for parents or grandparents to invest.

Other investments
It might not seem so from the volume of ads you are showered with but there are a whole range of investments available to parents. ISAs, National Savings, Offshore building societies, even stakeholder pensions (from April 2001) are all ways to save. There are also many children's bank accounts which offer enhanced rates.

As well as ordinary unit trusts many companies have specific packages for children - don't let the free teddy bears deflect you from looking at how they perform. It is worth remembering that parental investments for children incur tax on any income over £100. This is not true of investments made by grandparents, friends or other relatives, where the investment is treated as the child's and the whole child's personal tax free allowance of £4,335 is available.

Verdict?
It's horses for courses. Don't be paralysed by the variety of investments or the differing tax positions. Simply plump for one that you like the look of. It is better to save that £20 per month in a children's bank account than do nothing at all. The baby bonds are easy, and are tax free, but the answer is simply to do something, then sit back and feel smug about it.

Wills
Enough about taxes, back to death. Two thirds of the population die without a will, and we are constantly being nagged to make one. Jill Dando apparently never got round to it, which meant that her fiancée received nothing, and her father ended up paying around £200,000 in tax. But given the number of people who don't bother, should you?

The answer probably depends on how much your estate would be worth. If you are single, all your money will be divided equally between your children. If you are married, and your estate is worth more than £125,000, your partner will get the first £125,000 and a life interest in half the remainder, the other half going to your children. If you have less than £125,000 your spouse gets the lot. This might be alright by you, but the more cynically minded might want to tie the money up more firmly for children, in the event that their partner remarried, then died themselves, in which case all your money may end up with the new partner.

If both parents died, all your estate would pass to your children. However, making a will can minimise the amount of inheritance tax your children would have to pay, and in it you can appoint a guardian to your children. Various firms of solicitors operate on the web - it's hard to know how good they are without knowing the firm. There are also a few sites run by members of the Society of Will Writers, who charge from £45 for a single will. Currently these are quite cumbersome to operate online, and, to be honest, when qualified solicitors do not charge much more, you might be as well off consulting one of them.

Verdict?
If the above rules of distribution are fine by you, and you are not worried about your partner's activities after your death, maybe you don't need to bother. But given the chance to minimise inheritance tax and choose a guardian, plus the fact that an average will costs around £45 (or £80 for a mirror image will for two of you) why not sort it all out rather than leave your relatives to sort it for you? A legal guardian is particularly important if you feel there is the potential for family fights over who should take on your children's care, as a court case is the only final arbiter.

Conclusion
Just when you are at your poorest, you are beleaguered with thoughts of how to insure and save for those you love. First, do not let this get you down. Second, do something, anything you can. Forgo a couple of toys or new outfits, (which can easily cost £25 a time), and invest it in life insurance and some kind of saving. If you can afford more, do something about your pension/retirement saving, and increase your general investments. Other insurance policies would be great, but the majority of us cannot afford them, so do what you can and do not worry about the rest. Oh, and spend some of those savings on a good holiday, just to remind yourself of the joys of living.

Mumsnet would like to thank financial advisors, Gordon Leighton, for their assistance in writing this piece. If you would like personal advice you can contact them at tel. 020 7935 5737 or e-mail gl@gordonl.com. Or alternatively visit their website at www.gordonl.co.uk