A typical woman in her 60s has less than a third of what a male counterpart has saved in his pension pot.
We all know about the gender pay gap. Fifty years may have passed since the Equal Pay Act became law, but women still earn 17.3% less than men, according to the Office for National Statistics. This has a huge impact on women’s financial lives but one area that is often overlooked is the gender pension gap.
The gender pension gap refers to the significant difference between the value of the average man’s pension pot – and subsequent retirement income – and the average woman’s pension savings. Women in their 60s have an average £51,100 pension pot, according to the Pension Policy Institute (PPI). In contrast, the average man in their 60s has £156,600 ready to support them in retirement.
There are numerous reasons for this. The PPI believes time away from work to raise a family or care for older relatives and working part-time account for half the gap, with the gender pay gap accounting for another 28%. It is a complex problem that won’t be solved overnight – it is expected to take at least another 20 years to close the pay gap alone.
“The serious financial disadvantage women face in old age cannot be attributed to any one factor but is a combination of societal, health and financial factors stacked against them,” says Sian Fisher, Chief Executive of the Chartered Insurance Institute (CII).
“Women are living longer; however, care costs them more at the end of their lives. Women are succeeding in the workplace and the gender pay gap is hopefully closing but caring for family, even for just a few short years, significantly impacts a woman at retirement. It is the culmination of all these factors that is potentially driving women towards poverty in old age.”
The gender pension gap may be a real and depressing threat to a woman’s retirement income, but it can be overcome. There are a number of steps women, and their partners, can take to close the gap and put themselves on course for a comfortable retirement.
“The earlier women start to plan their financial future and retirement the better,” says Natalie Jaques, a Sanlam Wealth Planner. You might not know what your retirement income needs to be when you are in your early 20s but the longer you can contribute to your pension pot, the more funds you will have in retirement and you will also create more flexibility regarding the age you can stop working.”
The key to any successful retirement planning is to start saving early. This is particularly important for women. Start saving in your 20s and you can build a pot that will have 40 years to grow. This is also the time when you have the fewest financial commitments so can afford to save a healthy amount into a pension.
Saving just £100 a month into a private pension from the age of 22 to 30 could amount to a £184,000 pension pot when you hit 65, assuming annual growth of 7%.
Figures show that the gender pension gap is at its narrowest when we are under 30. In our 30s the gap grows as women take time out of work to look after children. But this doesn’t have to be the case.
“During paid maternity leave for the first 26 weeks, employer and employee contributions will continue to be paid,” says Natalie. “Even if you are receiving no income you can still make a pension contribution up to £3,600 per annum and you may also be entitled to National Insurance Credits which will count towards your State Pension. It’s worth exploring all your options when looking at your family expenditure during this time.”
It is also worth remembering that your partner can make contributions into your pension as well as their own. Just be aware that if they are a higher rate taxpayer, they can’t claim back extra tax as the level of tax relief on a pension is set by the tax position of the person who the pension belongs to.
Another way women can narrow the pension gap is by taking more of a risk with their pension investments. Traditionally, women are more cautious investors than men and this has a knock-on effect on their pension pots.
“If you are further away from retirement, say 15 to 20 years, you could take a higher degree of risk with your pension funds as they will be less impacted by short-term volatility and you will benefit from long-term growth,” says Natalie.
“As you are getting closer to retirement, within five to ten years, start to reduce the risk of your pension funds as if there were to be a market crash your funds would have less time to recover from their fall in value.”
Finally, make the most of your State Pension. “The State Pension is a weekly guaranteed income, which, for now, is index-linked and payable for life,” says Natalie. “It might not sound much but to look at it in a different way, for a 66-year-old to receive a pension of £175.20 per week for life increasing each year with inflation, buying an annuity you would need a lump sum in excess of £300,000.”
In order to receive the full State Pension, you need to have 35 years of National Insurance Contributions. If you took a career break to raise children and claimed child benefit you should have received National Insurance Credits to cover that time. However, you could have gaps in your National Insurance record for other reasons. You can top up your National Insurance with voluntary contributions, just make sure it is worthwhile doing so before you part with your cash.
It is also important not to forget about pensions if you get divorced. The average divorced woman has a pension pot of just £26,100 compared to £103,500 for a divorced man, according to the PPI. And while a pension pot is often the second most valuable asset in a marriage after property, the organisation says that seven in ten divorce settlements don’t include pensions.
Five steps to a comfortable retirement
Start saving early – the younger you are when you start saving for retirement the easier it is to build up a sizeable pension pot.
Take risks when you are young – when retirement is a long way off you can afford to take more investment risk in order to enjoy more growth.
Keep up contributions during career breaks – even if you have no income you can still pay up to £3,600 a year.
Make the most of your state pension – make sure you get National Insurance credits when you take a career break to care for family members.
Don’t forget about pensions if you get divorced – pensions are a married asset and should be divided between both spouses in the event of a divorce.
This article provides general guidance only. When considering your own pension arrangements, talk to your financial planner.