Confronting The Pension Gap and Planning For Financial Independence

While the gender pay gap remains a well-discussed issue, the pension gap often goes unnoticed. This gap refers to the disparity in retirement savings between men and women, presenting significant challenges for women’s financial security in their later years.

54 years following the introduction of the Equal Pay Act, we still find there is a disparity between the income, savings and pensions of women and men. The Pensions Policy Institute suggest that women’s pension assets are 62% of men’s pensions by their late 50s[i], and to have the equivalent sized pension pot by the same age, women would have to contribute a further 19 years than men if trends continue this way.

WHY DOES IT MATTER AND WHY DOES IT STILL EXIST?

Whilst the pension gap has decreased from 42% in 2006 to 35% in 2020[ii], there are a range of contributing factors like the gender pay gap, career breaks and divorce that result in women often facing lower retirement incomes compared with men.

The Gender Pay Gap is the most significant contributor to the perpetuation of the pension gap. As of April 2023, the gender pay gap stood at 14.3%[iii] when looking at all employees, but at 7.7% for full-time workers. By earning less than their male counterparts throughout their working lives, women find they have made lower contributions to their pensions and therefore, have smaller pension funds available in retirement.

Auto-enrolment thresholds have also proven to be a problem in perpetuating this gap as for employees who are automatically enrolled into their workplace pension scheme, women have a 32% lower chance of being enrolled due to not meeting eligibility criteria due to earnings[iv].

Additionally, the fact that a high proportion of women take maternity leave, career breaks for caregiving, and entering part-time work after having children result in reduced or minimal pension contributions.

Divorce can also play a significant role in pension fund disparities as 30% of women waive their rights to their husband’s pension during a divorce, compared to just 17% of men[v] which can significantly impact a woman’s ability to fund her retirement post-divorce.

With these factors in mind, and the fact that women are expected to have a longer life expectancy than their male counterparts, averaging 90 years for girls born in 2020 compared to 83.7 for boys, building more significant pension savings is crucial for sustained income in retirement.[vi]

HOW TO CLOSE THE GAP

Taking steps to reduce the gap is so important to ensure that you can have the financial freedom you want in retirement, with possible ways to tackle this including:

• Start contributing to your pension as early as possible and, if feasible, consider contributing more than the minimum requirements. This strategy allows for a higher fund value, which compounds interest over time

• Avoiding taking breaks in pension contributions can be managed by making payments into your pension, which can be up to £3,600 gross, even if you are out of work due to caregiving etc. This can include contributions made by your partner/spouse on your behalf

• If you have had a child, sign up for Child benefit in the mother’s name as this will ensure that you can continue to build up your national insurance record for your state pension even whilst you are not working (even do this when your partner/spouse would have to repay the child benefit due to their tax bracket)

• Ensure you are regularly reviewing your pensions, looking at performance and charges to make sure that they are growing as you would expect, at a risk profile you are comfortable with

• Seek advice from a financial adviser to review your current circumstances, your goals and how to achieve them

Closing the pension gap requires concerted efforts from both society and individuals. While progress has been made, there is still a long road ahead to achieve pension equality. Closing this gap is essential for ensuring women have enough money to sustain their lifestyles throughout retirement. By addressing systemic issues such as the gender pay gap and promoting financial literacy among women, we can work towards a future where retirement security is not determined by gender.

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Sources:

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[i] Frost, Georgie. n.d. “Mind the Gap! How to Close the Pension Gender Gap.” Times Money Mentor. Accessed May 9, 2024. https://www.thetimes.co.uk/money-mentor/pensions-retirement/mind-the-gap-how-to-close-the-pension-gender-gap#:~:text=The%20pension%20gap%20is%20the.

[ii] Mirza-Davies, James, and Khadijah Zaida. 2024. Review of The Gender Pensions Gap – Research Briefing. House of Commons Library. House of Commons Library. https://researchbriefings.files.parliament.uk/documents/CBP-9517/CBP-9517.pdf.

[iii] ONS. 2023. “Gender Pay Gap in the UK – Office for National Statistics.” Www.ons.gov.uk. November 1, 2023. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/bulletins/genderpaygapintheuk/2023

[iv] Department of Work and Pensions. 2023. “The Gender Pensions Gap in Private Pensions.” GOV.UK. June 5, 2023. https://www.gov.uk/government/statistics/gender-pensions-gap-in-private-pensions/the-gender-pensions-gap-in-private-pensions.

[v] Legal and General. 2024. “The Divorce Gap – Women See Their Household Income Drop Twice as Much as Men, Following Divorce | Legal & General.” Group.legalandgeneral.com. February 7, 2024. https://group.legalandgeneral.com/en/newsroom/press-releases/the-divorce-gap-women-see-their-household-income-drop-twice-as-much-as-men-following-divorce.

[vi] “Championing Financial Resilience for Everyone.” n.d. https://adviser.royallondon.com/globalassets/docs/adviser/misc/o6pd0007-gender-pension-and-wealth-gap-report-2024.pdf.