We hear a lot these days about the gender pay gap, and rightly so. However, it is far less often that we hear about the gender pension gap.
Earlier in 2018, Standard Life published a report showing that 55% of UK men own a pension. For women, however, the figure falls to just over a third. There is also a big disparity between the average value of women’s pension funds in comparison to men’s. In the UK, for example, around 15% of men have over £300,000 saved into a pension compared to just 4% of women.
Clearly, work needs to be done within the halls of power to redress this imbalance. In the meantime, however, what can women do to ensure they can retire comfortably?
Go Beyond Auto-Enrolment
Since the introduction of auto-enrolment more women have been automatically entered into a workplace pension. Most financial advisers would agree that this is a positive step, as it requires your employer to contribute towards your retirement fund. In 2018/19 the minimum employer contribution is 3% of your salary, whilst you are required to contribute at least 2%.
However, this 5% combined contribution is unlikely to go far enough for most people to provide for a comfortable retirement. What follows is an example of how this could play out over someone’s life. (Please use this as a rough guide – it is not a precise science or prediction):
Consider that the average UK salary currently stands at around £27,000 per year. (Studies suggest that the average salary for men is £30,000, whilst for women it is £25,000). A 5% contribution on £27,000 is £1350 per year.
Let’s assume that these contributions, when invested, produce an annual investment return of 5% over the next 25 years. That might produce a pension pot at around £67,000 by the time you hit the 25th year. This might sound like a lot of money. However, you must bear in mind that you will likely need a lot more than this if you wish to maintain your lifestyle in retirement.
Aegon, for instance, suggests aiming for two-thirds of your current employment income as retirement income. For a £27,000 salary, therefore, that would mean aiming for a pension pot which gives you £18,000 per year. Based on this, think about how quickly you would burn through that £67,000 you saved over 25 years through auto-enrolment!
Before you panic, remember that the state pension would give you a bit more breathing space. Currently, the full state pension could give you another £691 per month, or £8,292 per year. So this would take you a bit further towards the £18,000 annual target, but not all of the way.
In light of these kinds of scenarios, many financial advisers recommend that women (and men, for that matter) make additional financial plans for retirement as early as possible.
As things currently stand, it would be unwise to simply rely on the state pension and minimal auto-enrolment contributions to carry you into the retirement lifestyle most people desire.
Factor in Your Children & Lifespan
UK women tend to live longer than men. On the positive side this means your friends and family are likely to enjoy having you around for longer. On the downside it likely also means that women will need more money in retirement than men, to provide for their additional years.
The other important consideration is children. Certainly, more equality has come to Britain in the realm of child-rearing through the introduction of shared parental leave. Yet women still generally shoulder the majority of this responsibility, which can have a big impact on your pension savings.
Indeed, it is not uncommon for a woman to take seven years or more out of work in order to raise children. This means seven years of lost pension contributions. It also often means lower salaries for these women when they do eventually rejoin the workforce, due to truncated work experience.
What can women do about this situation? Some women might not want to have children, which perhaps gives more opportunities to earn and save. Other women, however, will want to have children whilst also finding ways to lay a strong foundation for their retirement.
Some Financial Options for Women
We do not want to paint a negative financial future for women. Many of our clients are women who are leading successful careers, who are building a strong store of wealth for their future, and who are retiring/retired comfortably. Yet we do not want you to be ignorant of the financial realities before you either.
There are a number of options available to women when it comes to retirement planning. One, of course, is simply to work longer. You will need to think carefully about whether this is something you want, and whether it is something you physically are likely to be able to do.
For instance, suppose you are a teacher in your 30s who is currently able to handle a rowdy class of 20 teenagers every day. However, will you still be able to do this into your 70s?
Another important consideration is to look carefully at your income and expenses, and to debate whether you could save more towards your retirement. For instance, you might currently be contributing 2% yourself towards your pension, but could you increase it to 5% or even 10%?
For some women, brave decisions might need to be made about whether, and how, to approach your boss for a pay rise. You should especially consider this if you know that you are paid less than the men in your industry or company who do the same job.
You will need to think carefully about whether now is the right time to ask, and also prepare a strong negotiating strategy. If you succeed in getting a pay rise, however, be careful not to simply spend your extra earnings on luxuries or liabilities. You would be wise to use at least some of it towards building up your retirement savings.
Finally, consider your own unique financial position and goals when it comes to children. If you are looking to have children and you are currently cohabiting with a partner or spouse, then explore ways to keep building up your pension pot in the meantime. Perhaps your higher earning spouse can help build up a pension pot on your behalf, for instance?
Childcare is also an important area to explore. It is usually very expensive, and can often wipe out the equivalent of one of the wages in a couple. On the other hand, childcare arrangements can allow women to continue progressing their careers as they help raise their children, whilst also continuing building up their pension pot in the meantime.