Women often face unique challenges when planning for their financial futures, especially when it comes to retirement. Factors such as the gender pay gap, career breaks, childcare responsibilities, and periods of reduced earnings lead to women accumulating smaller pension savings compared to men. This issue is compounded by longer life expectancies, leaving women more vulnerable to financial hardship in retirement.
Currently, women’s pension pots in the UK are on average 30% smaller than their male counterparts, and it is projected that it could take over 20 years to close this gap fully. Understanding the causes of this disparity and taking practical steps to address them is key to securing a stable retirement.
Why Does the Gender Pension Gap Persist?
The gender pension gap is a result of various factors that accumulate over a woman’s career and affect her pension savings.
- Lower Earnings and Career Interruptions: On average, women earn 14% less than men. This wage gap, combined with time out of the workforce for family responsibilities, significantly reduces women’s lifetime pension contributions.
- Automatic Enrollment Gap: Approximately 3 million women in the UK earn below the £10,000 threshold required for automatic enrollment into workplace pension schemes. As a result, they miss out on vital employer contributions and tax relief.
- Investment Confidence: Women tend to invest less outside of their pensions. Only 38% of women invest in assets other than their pensions, compared to 55% of men. Women also show more reluctance towards higher investment risks, with only 18% comfortable with this approach compared to 33% of men, which could potentially result in lower long-term returns.
Key Steps Women Can Take to Close the Gender Pension Gap
Although there are systemic challenges contributing to the gender pension gap, women can take several practical steps to help bridge the gap and secure a stronger financial future.
1. Maximize Your Workplace Pension
Ensure that you are enrolled in your workplace pension scheme, particularly if your salary exceeds the £10,000 threshold for automatic enrollment. This will allow you to benefit from employer contributions and tax relief.
Aiming to save 12-15% of your salary (including employer contributions) is a good starting point. If this isn’t immediately achievable, gradually increasing your contributions over time can help. Check if your employer offers matching contributions, as this can significantly boost your savings.
2. Start Investing Early and Wisely
The earlier you begin investing, the more time your savings have to grow through the power of compound interest. Regularly review your pension’s default fund and consider switching to more growth-oriented funds, such as global equities, if you have a long time until retirement.
In addition to your pension, consider other tax-efficient investment options like Stocks and Shares ISAs. These provide flexibility and the benefit of tax-free growth, further enhancing your long-term financial position.
3. Equalize Pension Contributions in Relationships
If you’re in a partnership, it can be beneficial to split pension savings between both partners. This strategy allows each individual to take full advantage of tax allowances and ensures greater financial independence during retirement. It’s also important to openly discuss pensions during key life events, such as marriage or divorce. Around 60% of divorces fail to consider pension splitting, which could cost women up to £77,000 in lost retirement savings.
4. Protect Your Pension During Career Breaks
Career breaks, particularly for maternity leave or family care, often lead to gaps in pension contributions. To mitigate this, it’s important to maintain pension contributions during such breaks, even at reduced levels, to ensure continued growth of your pension pot.
If possible, ask your partner to make contributions to your pension during extended breaks, or consider making catch-up contributions once you return to work to help bridge any gaps.
5. Regularly Track and Consolidate Your Pensions
Many women have multiple pensions from previous jobs, and over 2.8 million pensions in the UK are currently lost or forgotten. Regularly tracking your pensions and consolidating them can simplify your retirement planning and reduce any unnecessary fees. However, ensure that consolidating pensions is the right decision for you, especially if some of your pensions come with special benefits or guarantees.
Additionally, make sure to check your state pension entitlement regularly, particularly after career breaks, as this can help you better understand your total retirement income.
Looking Forward: Retirement for Women
To close the gender pension gap, both systemic changes and proactive individual actions are necessary. By taking these practical steps, women can significantly improve their financial stability and retirement prospects. Women who start early, invest wisely, and make informed decisions can build stronger, more secure financial futures for themselves.