Parents urged to discuss pension contributions during parental leave
Research highlights a lack of awareness among couples about third-party pension contributions.
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New research indicates a significant gap in financial planning among parents regarding pension contributions during parental leave. Octopus Money research found that more than a third of parents reduced or paused their pension contributions while taking time off work to care for a child. The study also revealed that 63% of parents were unaware that their partner could make contributions to their pension on their behalf.
Understanding third-party contributions
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A partner can contribute to another's pension through a third-party contribution. For individuals with no or low earnings, up to £2,880 can be contributed each tax year. With basic-rate tax relief, this amount increases to £3,600. This mechanism allows the non-working or lower-earning parent to maintain some level of pension saving.
Molly Haylett, a 30-year-old financial adviser, shared her experience of having her husband, Taylor, contribute to her pension while she was on leave with their first child. She told BBC News that while they both earned around £60,000 annually before having children, her career took a step back when she spent more time at home. 'There's an unintended impact on the person who spends more time at home with the kids,' Molly stated. She believes this is a conversation more couples should have before starting a family.
Taylor, 33, a train driver, admitted he was unaware of the option but supported Molly's suggestion. 'We committed to a life together and if I could help out I would and I was pleased that I did,' he told BBC News. The couple, who now have two children aged two and five, have adjusted their approach to finances, viewing them as a household matter rather than strictly dividing costs.
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Expert advice for couples
Katie Guild, co-founder of financial community Nugget Savings, highlighted that the pension gap can emerge during maternity leave. This occurs as an employee's pay decreases, leading to reduced contributions, or contributions may cease entirely during unpaid leave. Guild advises that couples should consider whether the working partner can help offset this shortfall. She recommends discussing key financial questions before a baby arrives, as these conversations are often easier when parents are not sleep-deprived and adjusting to a newborn.
The Hayletts also discussed their approach to teaching their children about money, including setting up pensions for both children from birth and using Junior ISAs. They also encourage their five-year-old to earn money through small jobs, introducing the concept of saving for future rewards.
Next steps for parents
Financial experts suggest couples check for available support, such as funded childcare hours and Tax-Free Childcare. They also advise that money conversations should continue beyond the initial parental leave period. Guild recommends that after the baby arrives, couples should review their budget regularly, update their wills, and consider life insurance.
Questions this report answers
+How much can a partner contribute to someone's pension?
A partner can make a third-party pension contribution of up to £2,880 each tax year. With basic-rate tax relief applied, this amount increases to £3,600, helping to maintain pension savings during periods of reduced income.
+Why is it important for partners to contribute to pensions during parental leave?
During parental leave, an individual's own pension contributions may reduce or stop due to lower pay. A partner's contribution helps to mitigate this shortfall, ensuring continued saving for retirement and preventing a long-term financial gap.
+What percentage of parents are unaware of partner pension contributions?
Research by Octopus Money found that 63% of parents did not know that their partner could contribute to their pension on their behalf. This highlights a significant lack of awareness about available financial support mechanisms.
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