Four reasons for the pensions gap – and how to tackle them


The nation isn’t saving enough for their retirement, but women end up with pension pots lower than men – which can have a dramatic difference to their lifestyle in retirement.

Women face a triple whammy when it comes to their pensions: they are not saving enough; they are not investing that money and so could be missing out on higher returns over the long term; and they live longer and so on average need bigger pots than men at retirement, according to research from the Pensions Policy Institute.

The first step is to acknowledge the problem, and then to look at ways of fixing your own pensions gap.

Problem 1: Women live longer

Women have longer life expectancy than men. For example an 18-year-old male today is expected to live until 86, while an 18-year-old female today is expected to live until 89, according to the Office for National Statistics.

This means that rather than just aiming for the same pension pot as men, women actually need to accumulate a larger pension so that it lasts longer. According to the PPI, in order to have the same income in retirement as men women would need to save around 5% to 7% more than men by the time they retire.

Because a pension can seem so far away, it’s a good idea to think about the kind of lifestyle you want in retirement, the things you want to be able to afford and where you see yourself living. If you then work back from this, it will help you to realise how much you need to save – and it can make it easier to make sacrifices now if you’re picturing what you can spend it on in the future.

And the increase in contributions doesn’t have to be massive. Fidelity research found that the average male pension today will be worth £142,836 at the state pension age of 68. For women, that figure is £126,784. However, if women put in just £35 a month extra into their pensions when they first start saving would bridge that gap – by generating £142,212 over a 39-year period.*

Problem 2: Think about your pension in career breaks

Research from AJ Bell found that women are missing out on £25,500 in their pension pots when they take two years off for maternity leave, while those who take a career break and return to work part-time could see £100,000 wiped off their pension pot when they come to retire**. Many women who choose to have children decide to take a career break, during which time their pension may take a hit.

If you took a year-long career break at age 30 and another year-long break at age 33, with no pension contributions in that time, your pension pot would be £25,493 lower than if you had taken no breaks in your career. Someone who takes those same two year-long breaks but then also returns to work part-time working four days a week for the rest of her working life, on the average salary for their age (pro-rata), would miss out on £100,845 of pension pot than if she took no career breaks and worked full time.

Clearly you’re not going to avoid having children, or return to work after just two weeks in order for your pension to look healthier. And your pension might understandably be pretty low on your radar when you’re pregnant and going on maternity leave, but the figures show the long-term impact of cutting contributions in the short-term. With maternity pay often so low cancelling your pension contributions can seem like an easy way to save some cash at an expensive time of life.

Instead, think about maintaining your pension contributions at your pre-maternity rate while you’re off. Likewise, if you return to work part-time, think about increasing your monthly contributions to what they would have been had you been working full time. Each time you get a payrise, think about whether you can up your monthly contribution to make up for any previous shortfalls or gaps in contributions, or if you get a bonus one year, consider making a one-off contribution to your pension with some of the money. These tips go for any gap in your career, not just ones caring for children.

Problem 3: Women aren’t investing enough

Decades of data show that women are more likely to stick to cash rather than invest their money. If we look at the data that the Government collects on people with ISAs it shows that women are slightly more likely to have an ISA – making up 51% of total ISA customers. But they’re more likely to stick to a cash ISA rather than a stock and shares version. Women made up 55% of people putting money in a cash ISA in 2016-17 (the latest year data is available) but just 43% of stocks and shares ISA customers.

Over the long-term (and a pension is certainly a long-term investment) historically investments have delivered a better return than cash, meaning that women who choose not to invest are missing out on potential future growth. For example, £20,000 invested 20 years ago in the FTSE All Share index of UK companies would now be worth £56,101, while the equivalent investment in cash would be worth £21,809, based on data from FE FundInfo.

So if you’ve not looked at where your pension is invested, or haven’t got around to buying investments in your Lifetime ISA, it’s never too late to start.

Problem 4: Low earners or non-earners blocked from company pensions

Auto-enrolment means that employers have to offer a pension to all staff now. However, the PPI estimates that there are 1.4 million working mothers who earn less than the £10,000 threshold for auto-enrolment to kick in. This means these individuals wouldn’t automatically be included in the company’s pension.

If you fall into this camp you can actively opt-in to the pension yourself, but there is a lot of pressure on the Government to fix the system to give all of these individuals tax relief, as currently anyone contributing from their net pay will miss out.

What’s more, there are 1.2 million women who are full-time carers for children, meaning they won’t have access to a company pension. If you fall into this camp and want to halt your pension gap from growing you could set up your own self-invested personal pension or a Lifetime ISA, which you can use to build a retirement pot with any spare money you have each month or year.

* Fidelity report: Methodology: Fidelity International calculated based on ONS earnings and pension savings data the average DC pension pot for a man and a woman at state pension age. Fidelity then calculated what would happen to the value of her pot if a woman added an extra 1% from an early age
** Based on a woman earnings the average UK salary with 5% pension contribution from their employer and 5% from the employee would have £368,580 at age 65, assuming 4% a year investment growth after charges

Important information: The value of your investments can go down as well as up and you may get back less than you originally invested.

Tax treatment depends on your individual circumstances and rules may change. Pension and ISA rules apply.

A Lifetime ISA is not for everyone. If you withdraw money before age 60, other than to purchase your first home, you will pay a government withdrawal charge of 25%. This may mean you get back less from your LISA than you paid in. Also, if you choose to save in a Lifetime ISA instead of enrolling in, or contributing to, your workplace pension scheme you will miss out on the benefit of your employer’s contributions to that scheme and your current and future entitlement to means tested benefits may be affected.

These articles are for information purposes only and are not a personal recommendation or advice.

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Written by:
Laura Suter

Laura Suter is Personal Finance Analyst at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management, and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.