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Beware of the pension gender gap

Despite moves towards gender equality in recent years, there still exists a large gap in the average retirement savings between men and women. In 2019-20, the gap stood at 37.9%; more than double the gender pay gap. On average, therefore, women face a less comfortable retirement than men, whose greater pension savings allow for a better lifestyle. Yet why does such a gender pension gap exist? And what can women do to try and close it? Below, our Carlisle financial planners offer some thoughts.

 

Why does the pension gender gap exist?

The House of Commons Library identifies three main reasons why women tend to have lower retirement savings: labour market factors, demographic differences and the structure of pension systems. The first highlights how women are more likely to take time out of work to raise a child, engage in voluntary care (e.g. for a relative) or be in part-time employment. Since most people do not contribute to a private pension whilst out of work (often due to budget constraints), many women do not build up significant independent retirement savings.

The second factor at play is that women tend to live longer than men. In the UK between 2018 and 2020, life expectancy stood at 79.0 years for males and 82.9 years for females. This means that women’s retirement savings typically need to stretch further than men’s. Finally, the third factor highlights how the auto enrolment system (which automatically puts you onto a workplace pension when you start a new job) can widen the pension gender gap.

Most people save into a pension through their employer, alongside their State Pension – which is built up using National Insurance (NI) contributions from your paycheque. Since women are more likely to occupy a part-time role or lower-paying job, this limits the amount that they can contribute to a workplace pension.

 

What can women do to ensure a comfortable retirement?

Various proposals have been put forward by politicians to address the pension gender gap. For instance, providing more affordable childcare for preschool children – helping more women get back into the labour market, sooner. However, you cannot afford to wait and hope for politicians to change things. Rather, what is within your power to look after your own interests, right now?

Firstly, think about how you can get the best State Pension deal. Each person is entitled to their own State Pension, which provides a guaranteed lifetime income after reaching their State Pension age (currently 66). This income rises each year by at least 2.5% under the “triple lock” system, helping the income keep up with the cost of living. You need at least 35 years of “qualifying” NI contributions to get the full new State Pension, which amounts to £185.15 per week in 2022-23 (£9,627.80). Given that a single person is estimated to currently need at least £12,000 per year to cover essential costs in retirement, your State Pension goes a long way to help attain this.

As mentioned, most people build up their qualifying NI years for the State Pension automatically via their payslips. Therefore, if you take time out of your career, perhaps to help look after your young children, then consider how you might secure the full 35 qualifying years you need to get the best State Pension deal. Perhaps you could return to work once the children get older. Or, it may be wise to consider making voluntary NI contributions to “top up” incomplete past years.

If you are in a committed, long-term relationship then your partner/spouse could be a helpful source of support here. Remember, you each get your own State Pension. Combined, this can amount to £19,255.60 per year (£9,627.80 x 2). Your partner could, therefore, help you to top up any incomplete past years on your NI record using their income or savings. This could help you both enjoy a better retirement income together in the future. This may also help your household save on income tax, since each of you can earn £12,570, income tax-free, from pensions such as your State Pension once you retire.

Regardless of relationship status, however, your State Pension is unlikely to be sufficient to cover all of your income needs in retirement. Most women will also need additional pension income from a workplace pension and/or personal pension. In 2022-23, you can put up to £40,000 into your pension(s) per year under your annual allowance – or, up to 100% of your income (whichever is lower). The amount you need to contribute will depend on your financial goals, your desired future lifestyle and the length of time you have until you retire.
Navigating the pension gender gap is a challenge, but not insurmountable. With the help of an experienced financial planner, you can craft an effective strategy to help meet your goals.

 

Invitation

If you would like to discuss your financial plan and retirement strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.

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This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.

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July 18th, 2022