Money: Babies need lots of love and financial investment

It's never too early to start planning for your baby's future.

THE BIRTH or adoption of a first child is an event that every parent looks forward to with both excitement and fear. New parents take on the frightening responsibility for the life of a helpless human being. That is balanced, though, by moments of great joy such as his or her first step, word or smile.

In the event, bringing up children is all too often much harder work than we expect. Yet few parents would have it any other way.

The one exception to that rule is when it comes to finance. Many parents start a family when their income is still low, the mortgage is enormous and investment capital is low. Despite that, almost overnight a new set of financial responsibilities has been taken on.

When planning how best to manage the situation, your priority should be protection. Many people will have life cover, usually up to four times their income, as part of their pension, and that route is always the best place to start because premiums can be offset against tax. The downside is that, if you change or lose your job, the life cover goes too.

Derek Brown, of the independent financial advisors Warwick Butchart and Associates, recommends family income benefit for many families.

This provides an annual income in the event of death. In the past, such cover was often written to the child's 18th or 20th birthday. Now, with one in three school leavers going on to further education, a longer term - perhaps to age 25 - is more popular. As the cover is effectively decreasing as you get older, it can be very cheap.

GA Life would charge a 30-year-old man pounds 13.18 a month for pounds 10,000 a year cover, for 25 years. If he died in the first year, the insurer would pay out a total of pounds 250,000. If he died after 10 years the total would have fallen to pounds 150,000.

The need for life cover falls away as children grow up and are no longer so financially dependent, but your surviving partner will still need to live, and estate planning may then be important too. Generally, however, beware of any adviser who argues that you need enough life cover to provide an inflation-linked income in perpetuity. As financial commitments fall away in the future, so does the need for life cover.

How much cover do you need? Four times income is usually a minimum, but the way to calculate it is to work out how much you would need to pay off any capital commitments such as mortgages and loans, then how much income your surviving family would need to live on, and for how long.

Even if one parent is not working, consider life cover on both, together with critical illness, to give a lump sum on suffering a life-threatening illness, and income protection, to get a monthly income, in the event of long-term illness or disability.

Many critical illness plans now include free cover for dependent children up to pounds 15,000, or half the sum assured if less.

Savings are particularly important for a child's future education. At one time, only school fees planning was considered. Now, the need for university tuition fees means that many students may end up in debt.

Building up savings for them can help minimise the size of their eventual debt. Often, grandparents and other relatives also welcome the opportunity to help youngsters save for the future, especially if the money is to be used for education.

Private school fees cost, on average, around pounds 4,000 a year for boarders, and pounds 1,700 for day pupils, and planning to pay those fees is best started before the child is born, in order to give the longest possible time for the investment to build up.

Many parents start to think seriously about it only when their offspring already have a name down at a first school. Generally, if there is less than five years to go, invest as much as you can afford into deposit savings. In the longer term, Tessas, Peps and unit trust savings plans are likely to prove better. Endowment assurance-linked schemes may give advantages to higher-rate taxpayers, but often with a lack of flexibility.

Fiona Price, of Fiona Price and Partners, independent financial advisers in London, warns against prepackaged school fees investments: "The problem with many packages," she says, "is that they can prove to be inflexible and quite expensive. It is usually best to choose from what's available in the market. That way it will meet your needs, and you can get best value for your money."

Some independent schools run charitable trusts, which can give income tax benefits, but these are best considered only if the child will definitely attend that school. "If you are considering school fees planning, make sure you have sufficient protection cover too," Fiona Price warns. "Many parents often overlook the fact that if they are no longer alive there may be no one to continue paying the school fees."

When children are small, parents often have to face sacrifices as well as get accustomed to a new way of life. With careful planning, however, they can do so with the peace of mind that comes with knowing that the family is protected against the worst eventualities, while savings are also being built up to help the children out as they get older.

Fiona Price & Partners: 0171-430 0366. Warwick Butchart & Associates: 01242 237155. General Accident Life: 0500 100 200. For a list of independent financial advisers near you, call IFA Portfolio on 0117 971 1177

Andrew Couchman is the publishing editor of "Health Insurance Report"