In her last article Sharon Taylor, Financial Planner at Magus, touched briefly on the importance of starting your pension early, however, back in the real world, there are a whole raft of reasons why women can’t easily save into a pension. Sharon explains what steps you can take to give yourself the best possible pension.
Women are more likely to take career breaks or move to part time work in order to juggle work with the needs of their family. Woman are also more likely to take on caring responsibilities, so there’s a risk we have to give up work earlier than planned, there’s also the possibility of breaks later in our careers, and then it can be hard to return to the workplace on the same salary. We also tend to live longer, meaning the money also needs to last longer.
The average pension pot of a 65-year-old woman in the UK is £35,800 - just one fifth of the average man of the same age. Here’s a quick summary of when and how that gap can appear and some of the obstacles in the way of women reaching their full potential, that at the same time can undermine their financial security;
Student life and early 20’s
More young women than ever before are choosing apprenticeships and degrees in lower paid sectors, impacting their earnings.
Late 20s and early 30s
52% of woman in their late 20s say they don’t understand enough to make decisions about retirement savings. Interestingly, HMRC research shows not many parents are aware that they can get National Insurance credits which count towards the state pension through child benefits - even if you/your partner earns over the threshold - and are unaware of the link between the two. You can check your National Insurance record to see what you’ve paid to date and if any gaps have meant some years don’t count.
30 and 40s
Women continue to perform the majority of housework and caring responsibilities - 1 in 7 women in their early 40s care for an elderly relative, - impacting their ability to earn and save. And sadly, 42% of all marriages end in divorce. Often in divorces, pensions are the second largest asset after the matrimonial home. It is important to understand the real value of a pension and the options available on divorce.
50s and through retirement
Early retirement among woman before age 65 is falling seven times faster than men, largely driven by the increase in the state pension age. Also, financial insecurity in later life, a result of a pension shortfall, shifts in family structure, well-being and social care systems can leave women exposed.
But don’t abandon all hope just yet – here’s a few things you can do now.
Start contributing as much as you can afford.
And as soon as possible - and get your money in your pension working harder for you too. When you start a pension through work, if you don’t decide where you want your money to be invested, you’ll automatically be put into ‘default’ fund. These are designed to meet the needs of the ‘average’ scheme member splitting your money between different assets in order to help spread any risk. However, this approach can mean lower returns over the long run than other share-based funds. If you have ten years or more before you need the money, you may be able to take more risk in share-based funds. These tend to rise and fall more in the short term but have better potential for growth over the long term.
Work out how much pension money you might need
When you retire, you’ll need money to live on for the rest of your life. There are several life expectancy calculators that will help you to check how many years you might spend in retirement. The Office for National Statistics offers one such calculator.
Top up your workplace pension
Your workplace pension is separate to your state pension and if you’re employed, aged between 22 and state pension age, and you earn £10,000 per annum or more, you should already be in a pension scheme that both you and your employer will be paying into it. In some cases, if you pay in more than the minimum payment, your employer will match it, which will make an enormous difference in how it grows, so if you can afford it, definitely top it up - the more you pay in, the more tax relief you’ll get from the government and the more you could get back when you retire. You can also set up extra personal payments into your pension.
There are some signs that progress is being made and some evidence that the gap is reducing. Women today are increasingly successful, excelling academically and contributing both economically and creatively throughout business and society. However, the fact remains women usually have smaller pensions than men - If you earn less than men, get less paid into your pension than a man, lose out on tax relief, if you’re a low earner and/or take time out to look after your children or elderly parents, you won’t be able to set aside as much as a man. On top of that, policy changes, such as the rise in state pension age, have had a devastating effect on many women.
Policymakers, regulators, the financial industry, employers and individuals need to get involved so that things change for the better and more needs to be done to build trust and an understanding of products and services among women. At a policy level, pensions need to be designed to take account of the challenges women face.
Employers need to get more involved in their workers’ financial wellbeing and make sure pensions are inclusive
More employers (and policymakers) need to think of flexible working as the norm and not the exception
Young women need to be made more aware of the financial pitfalls they may face
The Chartered Insurance Institute has some great resources and events through the ‘Insuring Women’s Futures’ campaign, which looks at how to improve women’s pension outcomes, supporting young people’s financial mindfulness and setting standards in flexible working for carers and parents.
The need for women to be financially resilient and independent has never been greater - being equipped to make informed pension decisions that reflect our financial lives and personal circumstances is key. Change won’t happen overnight, it takes time to turn a juggernaut, but we do need a change in social attitude and the stereotypical expectations of men and women.
Under HM Revenue & Customs (HMRC) rules there is a limit on the total amount you can save each tax year into all registered pension schemes and the tax relief you receive on your contributions. The maximum is 100% of your earnings (up to the annual allowance) or £3,600 gross, whichever is higher. The annual allowance limit for the current tax year is £40,000. This limit includes all your contributions, tax relief and employer contributions across all your pension arrangements. If you go over this limit, this will result in a tax charge, known as the annual allowance charge. If you earn over £110,00 a calculation is needed to determine how much you can pay into your pension. The value of an investment may fall as well as rise. You may get back less than the original amount invested. It is therefore important that you understand the risks and commitments. Past performance is not indicative of future performance. This article should be used for information purposes only and is subject to change without notice. None of the information contained in this article constitutes financial or other professional advice in any way. If you require additional information, you should contact Magus directly. While Magus uses reasonable efforts to ensure that the information contained within articles is current and accurate at the date of publication, no warranties are made, either expressed or implied, as to reliability, accuracy or completeness of the information. Magus accepts no liability for any loss arising directly or indirectly from the use of or action taken in reliance on such information.