Cash clinic: First child's arrival means rethink of financial priorities

Q My husband and I are in our early thirties and I have just returned to work after having our first child last year. This change in circumstances and increased responsibility has made us think about starting to build a retirement fund and savings pot for our future, though neither of us are sure how best to set about doing this. I earn around 32,000 a year and my husband earns just under 38,000. Taking into account our living expenses, child care, mortgage and car loan, we spend about 3,500 a month. Whilst I want to save for our future, I obviously don't want this to make it difficult to pay our current expenses. Any advice you can offer would be much appreciated.

PJ, Kirkcaldy

AYour circumstances are fairly typical for people with a young family - you appreciate the need to save both for a medium term rainy day and longer term for your retirement. But you know you must balance these future needs against the very real demands of current day to day living.

Based on the salary information you provided and your stated expenditure, the amount you have to save each month is likely to be in the low hundreds. This savings budget is likely to fluctuate as your circumstances change.

You should, where possible, make some contingency for factors outwith your control, i.e. one or both of you losing your job or being unable to work for a prolonged period through illness. You should also consider the impact on your disposable income of the inevitable future increase in interest rates and therefore mortgage costs.

In practice, a balance should be struck and I recommend that you consider more than one form of saving and also address any protection needs that you have. For many young families effecting protection in the event of death or illness can be a higher priority than long term saving.

I would suggest that you each pay some of the available money into an individual savings account (Isa). Isas allow you to save up to 10,200 a year tax efficiently and can be used to provide tax-free capital returns or income. They also allow access to your savings should you require it.

Also consider a pension scheme. If you are employed you should be able to join a pension scheme offered by your employer if you have not already done so. This is especially appealing if your employer makes a pension contribution.

You are likely to be paying income tax at the basic rate and would therefore receive tax relief at 20 per cent. Pension funds grow in a tax efficient environment and, when benefits are drawn, you could receive up to a quarter of the fund as a tax-free cash lump sum. This incentive to save through pension is offset somewhat by the lack off access to funds before age 55 and the taxation of the emerging pension as earned income. Pensions become more appealing where higher rate tax relief can be achieved and the pension produced on retirement is taxed at basic rate.

The most suitable structure for your savings will depend upon your personal circumstances, objectives and attitude to investment advice and I would urge you to take independent financial advice to ensure that you adopt the most suitable strategy.

• Stephen Hall is a wealth manager at HBJ Gateley Wareing.

• If you have a question you need answered, write to Jeff Salway, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected].