Pensions advice for Mums

When you choose to opt-out of full-time work, either be a stay at home parent or to work on a part-time basis, it may mean you change how much or how you contribute to a pension. Indeed, you may be one of the many people who haven't yet started saving towards a pension. Whatever your circumstances pensions can be worrying...and you may be confused about your options now you are a mum.

The Department for Work and Pensions have put together some simple information about pensions and answers to some of the most common questions affecting parents looking for advice about their pension:

Pension plus points

Tax: You get tax relief on the money you put into a pension. So, if you pay income tax at the basic rate of 22% then every £78 you put into your pension gets topped up by £22 from the Government. If you pay tax at the higher rate of 40%, then every £60 you put, the Government adds £40 extra.

Even if you are not working, tax relief on pensions can still be an advantage. Your partner or family member can pay up to £3,600 tax free into a personal pension for you every year. This would reduce their taxable income and could make a big difference if they’re on the borderline between higher and lower rate tax.

Employer contributions: If your employer offers a pension and you don't contribute, you could be turning down an average £350 a year of extra cash from your employer and the government. Ask your employer:

Do you offer a pension scheme?
Is it Defined Benefit or Defined Contribution?
How much money do I have to put in and is there a limit?
How much will you put in?
Am I eligible to join? How do I join?
What will happen if I leave the company?

Questions & Answers:

What happens to my state pension when I stop work to look after a child?

If you are taking time out to look after a child under the age of 16 and you get child benefit, you should be awarded Home Responsibilities Protection (HRP) automatically. This helps to protect your rights to the Basic State Pension. If your child is under six, your State Second Pension pot will be protected as if you were earning £13,000 a year.

Things are changing from 6 April 2010. After that date, if you're taking time out from work to look after children under 12, and you’re getting Child Benefit, you'll get National Insurance credits. These will count towards both the State Pension and Second State Pension. The years of HRP you have from before 2010 will be converted to credits which will count towards your Basic State Pension and State Second Pension when you retire.

What happens to my work pension when I stop work to look after a child?

If you are putting money into your work pension and are about to go on maternity leave or take a career break to look after a child, ask your employer if you can still make payments in to your pension during this time. You can have more than one pension scheme so you may want to consider opening a personal pension plan if you are taking time out from work to bring up your family.

What happens to my work pension if I work part-time?

If you work part time and your employer has an occupational pension scheme, you will usually be allowed to join it. Make sure you ask your employer about the terms and conditions.

Will my work pension be enough?

Many pension providers will send you a yearly statement of how much your pension fund is worth, and if you don't receive one you can ask for one. This will give you an idea of what you can expect to get when you retire, and will help you decide if you need to save more.

A recent poll showed one in six people have no details of where their pension money is saved. One of the main reason for this is the number of times people change jobs, with one in five UK adults changing jobs five times by the time they are 34 years old. If you want to trace your pension see: www.thepensionservice.gov.uk/atoz/atozdetailed/pensiontracing.asp

How do pension contributions affect child tax credits?

If you're contributing to a pension from your earnings less income will be taken into account when your tax credits are worked out than if you weren't making them. So making pension contributions could increase the amount of tax credit you get.

Is it worth saving while I take time out to look after my family?

Every case is individual and the below example is just for illustrative purposes but we can see the impact of pension saving if we compare two women, Anna and Sarah, both born in 1983.

Anna and Sarah save into a private pension*. They started working and paying into their pension at 25 years old. They continue working up to the age of 30 when they both take a five year career break to look after their children. During this time, they get credits towards their state pension.

As part of the family budget Anna has allocated £11 a week** for her private pension. She gets tax relief on this money. Sarah does not save into her private pension during her career break.

When Anna and Sarah retire, Anna's weekly private pension is likely to be around 11% higher than Sarah's.

So it could be worth considering pensions when thinking about your family budget, while taking time out to care for children.

*This scenario assumes that they earn the median wage for a woman, contribute 4% of their earnings with 1% tax relief and reasonable assumptions about factors such as investment growth. Before 2012 (when the proposed pension reforms are due to take effect) the pension Annual Management Charge (AMC) is assumed to be 1.5% for the first 10 years and then 1% afterwards. From 2012 the AMC is assumed to be 0.5%, with an employer contribution of 3% when in work.

**Figures are presented in 2007/08 earnings terms

Mike O'Brien - Pensions Minister has the following to say about pensions and being a parent - "There is no one size fits all when it comes to pensions. But there are some basics that can get you started and saving early really can make the pensions pounds work harder.Our population is ageing, pensions are changing and we have more hopes and dreams for later life. The State Pension can give you a basic income when you retire but many people want more money than that so they can maintain or improve on their current lifestyle.

Saving early can make a big difference to the pension you'll get. A pension is one of the most effective ways to save money because you can get tax relief on the money you put into a pension scheme As a parent you probably spend most of your time caring for others and putting their needs first. I'm hoping that armed with information on pensions, you will be able to make the right choices for you so that when your family has grown up, you will be able to look to the future with confidence."

Remember - No financial products, including pensions, are completely free of risk. The amount of pension you get may depend on how well the scheme has performed by the time you retire. Private pensions are a long-term investment. This information has given you basic information about the choices currently available.

For more information to help you decide what's best for you, you may find it useful to contact: the Financial Services Authority, The Pensions Advisory Service helpline on 0845 601 2923 or your local Citizens Advice.