Tips to limit the impact of childcare on your financial resilience

Children may be priceless, but they are increasingly tough on the bank balance, with the cost of holiday childcare ramping up again. It’s the last reminder families need when they are starting the holidays, which is already a super-expensive time of the year with kids clamouring for trips and clubs.

This isn’t personal advice. If you’re unsure about a certain course of action, take financial advice. ISA, pension and tax rules can change, and their benefits depend on your circumstances.

How are family finances looking?

The 2024 HL Savings and Resilience Barometer shows just how tough it is, especially for single parent households. Single parents suffer particularly badly, partly because they either cannot work or have to add childcare to the burden of costs they face alone.

• 71% have poor or very poor financial resilience – more than twice the average rate.
• On average, they have £50 left at the end of the month.
• Only one in four have enough emergency savings* (26%).
• They’re also much more likely to be behind on bills or debt repayments.

It’s little wonder many parents, particularly women, are choosing not to return to work, given their pay is often wiped out by the cost of childcare. The knock-on effects of this can be huge.

Taking time out to care for your children

For those unable to cling on to work, it’s often much harder to restart a career once children have become older. This can have a real impact on female financial resilience later in life.

Women in their late 50s have just 62% of the pension wealth of men according to the Pensions Policy Institute. Improving the opportunities for flexible working and affordable childcare are a big part of solving the gender pay, pension and investment gap. There is some more help on the way, but it’s going to take time to be delivered.

Is childcare help on the way?

The Conservatives were rolling out free childcare for children aged nine months and over – which should be fully in place from September 2025. Questions remain about whether there will be enough places nationwide to deliver the policy. However, Labour has also committed to the expansion and has promised to deliver 100,000 childcare places in 3,300 nurseries in schools, paid for by introducing VAT on private school fees.

The new government’s idea is that spare classrooms will be freed up, which may be doable given that there are falling numbers of primary school children. Although the space may be available, the staff might not be.

The education sector is struggling to attract and keep staff, due to low rates of pay and competition from other industries. There are already high numbers of vacancies and it’s estimated at least 40,000 more nursery nurses and pre-school teachers will be needed to meet demand.

Tips for new parents worried about the childcare burden

1. Widen your safety net

   We should all have a savings safety net of 3-6 months’ worth of essential expenses in an easy access savings account, in case of nasty surprises. When you have children, your essential expenses will increase, so you need to build your net bigger to account for this. If you already have emergency savings, consider the impact of inflation too – which will mean you’ll need more emergency cash to cover any expenses.

2. Set up a bare trust account

   Setting up a bare trust account for your child while they’re still young, for one, gives money time to grow, and can help to reduce the amount of inheritance tax that might be paid in the future. The assets sent to the trust are held and managed by trustees if someone, a donor or a settlor, makes an irreversible gift to the trust. The benefits of this are, anyone can open and manage a trust and how the money is invested, even if you aren’t the parent. They can also be useful for inheritance tax planning and can reduce the value and tax of an estate.

   The child is also automatically entitled to assets in the bare trust when they turn 18. You can withdraw money held in a bare trust before the child turns 18, but it must be for their benefit. Setting up a bare trust is complicated and it's advisable to seek advice.

   Find out more about the Bare Trust

3. Make decisions about childcare

   Often the biggest challenge in the early years is childcare. In some cases, a parent will want to give up work for a while, but in other cases they would prefer to work, but don’t feel they can afford the cost of childcare. It’s worth considering all the options before making a decision. Take the time to explore everything that’s available in your area – the difference between an expensive nursery and a childminder can be significant.

   You can also take steps to cut the formal care you need to pay for. This can include asking grandparents for help, juggling shifts with your partner, or sharing care with other friends.

4. See what help is available

   Check if the government will offer help too because both tax credit and universal credit have childcare allowances. Today’s babies will also benefit from the change, that means from April 2024 working parents of two-year-olds can access 15 hours of free childcare. From September this will be extended to babies from the age of nine months, then from September 2025, this will be expanded to 30 hours. In the interim, if you don’t already use childcare vouchers, you can’t sign up for them, but you can still get tax-free childcare to make your money go further.

5. Protect your family and yourself

   Make sure your will is up to date and takes all your children into account – including establishing guardians if something was to happen to both parents. You also need to make sure you have enough life insurance, so they’re cared for financially if you pass away.

   Children can easily soak up all the cash available, but it’s vital to keep your own needs in mind too. If you put your savings and long-term investments on hold, you’ll have an enormous amount of ground to make up later – particularly when it comes to pensions.

   Where one parent works part time for a longer period, there’s a risk they have a long break from paying into their pension, which can have serious repercussions for their retirement income. Some parents will choose to make extra contributions into the pension of the person working full time to make up for it, but it’s worth understanding the implications of that – particularly for unmarried parents. It makes sense to consider your household finances in the round and talk about ways you can free up cash so you can both pay into a pension if possible.