We hear a lot about the gender pay gap, but one area that’s often overlooked is the knock-on effect this has for retirement savings. While progress has been made, on average, women are reaching retirement age with far less put away than their male counterparts.
The £100,000 pension gap
Eight years after auto-enrolment was introduced, the pension gap is closing.
As a percentage of earnings, 59% of women are now saving adequately for their future, according to a report from Scottish Widows. This is just 1% behind men and the narrowest gap on record. However, despite men and women saving broadly equal shares of their income, the amount they are ending up with at retirement varies significantly due to the pay gap.
On average, women are saving £1,300 less each year than men. Over a career, this adds up to a pension gap of £100,000. It’s a figure that can significantly affect financial security once giving up work and what is achievable in retirement.
There are many reasons why women are saving less. One of the key factors is that women are more likely to take a career break or work part-time, especially when they have young children. In fact, 75% of part-time workers are women. Women are more likely to work in low-income positions too. The average annual difference in median wage between men and women in full-time work is £6,100.
When looking at these differences, the focus is often on the short-term financial impact. However, the long term, and what it means for retirement, is just as important. There are some steps women can take to improve their financial security later in life.
1. Start saving into a pension as soon as you can
Retirement saving can seem challenging. The goal sum you want to achieve at retirement is large. However, you’ll be saving this over your entire career. Spread out across four decades, the amount can seem less daunting.
It’s never too late to start saving into a pension, but it’s never too early either.
The sooner you start saving into a pension, the better the position you’ll be in. To achieve the same goal, your regular contributions will be less. You’ll also have longer to benefit from investment returns, boosting your retirement fund further. Despite this, 17% of women aren’t saving anything at all. Even small but regular contributions can add up.
2. Take some time to review your pension arrangements
Under auto-enrolment, most workers will now be automatically enrolled in their Workplace Pension scheme. It’s worth taking some time to understand what you’re contributing, what your employer is contributing, and how pension investments are helping these contributions to grow. Your pension provider will also provide a pension forecast, showing an estimate of what your pension is expected to be worth at retirement. It can help you see if you’re on track.
You may also have pensions from previous employers too. Review these alongside your latest one. In some cases, it makes sense to consolidate pensions into a single pot, making your savings easier to manage.
3. Speak to your employer
Speaking to your employer can help you understand the benefits on offer.
For example, if you’re not eligible for auto-enrolment, your employer may still offer you a Workplace Pension scheme if you speak to them. There may also be other options for improving your long-term financial security, such as a salary sacrifice scheme that will increase pension contributions.
Under auto-enrolment, if you contribute to a Workplace Pension scheme, your employer must also contribute to it. This is currently 3% of pensionable earnings. However, some employers will increase this if you increase your contributions too. As a result, it can be worthwhile increasing your own contributions to benefit from this.
4. Continue contributing even when you’re not enrolled in a Workplace Pension
You don’t have to be part of a Workplace Pension scheme to continue adding to a pension. Whether you’re taking a career break or aren’t eligible for auto-enrolment, setting up your own contributions can help close the gap and keep retirement plans on track.
You can choose to open a Personal Pension or contribute to existing schemes, such as old Workplace Pensions. Even small, regular additions to your pensions can add up over the long term and improve your retirement prospects. You can also choose to add a lump sum to pensions.
5. Weigh up the pros and cons of diverting savings into a pension
When we think of financial security, it’s often the short-term we focus on. Given that 72% of women have experienced financial hardship, it’s not surprising that pensions can be an afterthought.
However, there are benefits to saving in a pension if you have long-term goals. You will receive tax relief on your pension contributions. That means an extra 20% will be added if you’re a basic rate taxpayer, and more if you’re a higher or additional rate taxpayer. It gives your savings an instant uplift. As pension contributions are invested, they also aim to deliver long-term returns.
If you’re in a position to do so, diverting money from your usual savings into your pension can make sense. However, you need to keep in mind that your pension money will not be accessible until you’re 55, rising to 57 in 2028. As a result, you need to be in a secure financial position and have an emergency fund in place before doing so.
The research found that 58% of women are worried about running out of money in retirement and 55% don’t feel like they’re preparing adequately. If you’d like to discuss your current pension arrangements and what you can do to secure the retirement that you want, please contact us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
Richard Fyfe is a Chartered Financial Planner and a Director of Fyfe Financial.