Top tips on pension planning for women
Research released this month revealed that women in the UK currently face retirement incomes of £4,900 lower per year than men. Although women’s average annual retirement incomes will hit a record high of £16,900 this year, this is still markedly lower than male retirees, who average £21,800 a year in retirement according to latest figures.
The research by Prudential also showed that one in six women will have an income below the minimum standard of £9,982 set by the Joseph Rowntree Foundation compared to one in ten men.
It has been interesting to read media commentary on these facts. Some are framing the statistics in a positive light; hailing the new ‘record high’ averages with others noting the gap that still exists between the sexes. Whilst it is positive to see the gap between men’s and women’s pensions narrowing, we think there’s still a long way to go.
So here, we offer women some food for thought around paying into pensions and closing that gap.
Earn as much as you can
The main reason that women pay less into their pensions than men is that they earn less. So the number one tip is to try and ensure you’re earning the maximum you can. Far too many women still shy away from asking for a pay rise. If you think you should be paid more or are earning less than the industry average for your role, approach your employer about it. If you know or suspect you are being paid less than a male counterpart, this is unlawful. Approach your employer in a well-structured, measured manner. Remember that if you are paying into a workplace pension scheme, if you earn more, your employer will also pay more into your pension as pension contributions are usually based on a percentage of your salary. So a pay rise will not only boost your income now, but also in the future.
This is particularly important for women who are in lower paid industries or earning less due to working part time hours.
Save as much as you can
Recent statistics from the Department for Work and Pensions (DWP) show that 84% of workers who qualified to be in a workplace pension actively took part last year. This is a real victory for auto-enrolment pensions; the 84% figure is a dramatic increase from when they were introduced in 2012. However, there are real concerns that the amount people are setting aside is too low a proportion of their earnings, leaving the distinct possibility of a shortfall by retirement age. The current minimum level of contribution into defined contribution workplace pensions is only 3% from the employee and 2% from the employer, totalling 5%. Although this is set to rise to a total of 8% by April 2019 (5% from the employee and 3% from the employer), many commentators say this is still too little.
If you are able to accumulate ‘savings’ after all your monthly outgoings, you should seriously consider directing some of this into your pension. The longer you can leave a pension fund to accumulate, the better due to the effects of compounding (the process of reinvesting any gains made. Starting to save as early as possible is also key to benefitting from compound interest.
Understand the impact of decisions
The effects of earning less than men are made worse by the fact that many women take career breaks or change to part time working – often following on from having children but also in order to care for older relatives. We’re not decrying these important choices, we know family comes first and you can’t buy or get back precious time with loved ones.
However, we are saying that you should at least be aware of the impact these decisions can take on your long-term finances. Most of the time we base changes in our working patterns on the immediate affordability; not considering that part-time working or a career break will mean we will also be paying less into a pension. More needs to be done to communicate the impact that such decisions can have on retirement savings. Although money isn’t the only factor when making life decisions, it is at least important to know about and understand all the financial outcomes. If you take a career break or reduce your hours, being aware that you will contribute less to your pension fund during this time, and may need to return to try and make up for the shortfall later on in your career, is a consideration.
The same applies if you decide to set up your own business or work for yourself, which a growing number of women are doing. It may be a struggle financially in the first few years and paying into a pension comes bottom of the list, but when the fruits of your labour hopefully start to pay off, you should think about setting up and contributing to a private pension plan.
For more advice on any aspect of pension or financial planning, contact us and one of our advisers will be happy to help you.