Pensions: Money Box caller talks impact of age differences
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Pension funding problems are hitting women particularly hard as Scottish Widows latest Women & Retirement Report showed women will need to save an average of £185,000 more during their working life to enjoy the same retirement income as men. This “colossal gender pension gap” is made up of a savings shortfall, plus the need to fund a longer retirement as women, on average, outlive men.
Longer lives and smaller pensions
The latest report, which has been running annually since 2006, showed women currently in their 20s will have only saved around £250,000 by the time they retire. Men on the other hand will have closer to £350,000 on average.
Adding to this, a 25-year-old man today will live to 86 based on current estimates, while a woman can expect to reach the age of 89. With women living three years longer than men, the average woman will need £400,000 in her pension pot to achieve the same level of retirement income as a man with £350,000.
Scottish Widows noted “with longer lives comes a greater need for care in older age”, and estimates suggest women spend on average 460 days in care homes, while men spend just 100. With the average cost of care £679 per week, this means women can expect to spend £35,000 more than men.
Overall, this means women need to save an extra £185,000 to achieve the same retirement lifestyle as a man. This would require saving an extra £2,500 per year, or £210 every month, from their mid-20s until the day they retire.
Jackie Leiper, Managing Director of Workplace Savings at Scottish Widows, commented on the results.
“It’s well known that the gender pay gap has a damaging impact on women’s retirement prospects,” she said.
“But even if we close the savings gap, pension equality would still not be achieved. Women need to fund a longer retirement and shell out more on care costs.
“There are ways to help level the playing field – from enhancing maternity pensions to offering better parental leave and financial support for childcare – so that women are no longer financially penalised for raising a family. Of course, we must also tackle the larger structural issues in our society, like the gender pay gap.”
Scottish Widows went on to propose a range of recommendations designed to help eradicate gender pension inequality, including reforming automatic enrolment to increase default contributions and the mandatory inclusion of pensions in divorce settlements. The report also recommended raising awareness of joint annuities and lobbying for regulatory intervention on the issue.
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Closing the Adequate Savings Index gap
Fortunately, the Women & Retirement Report did highlight some positive elements. The report showed the same proportion of men and women are now saving enough for a comfortable retirement (61 percent) for the first time on record.
In 2007, the Adequate Savings Index recorded its widest gap ever, with 54 percent of men saving adequately versus 41 percent of women. In 2021 that gap has closed completely, with three out of five men and women (61 percent) putting away the recommended minimum of 12 percent.
Ms Leiper concluded: “After 17 years of reporting on gender differences in our Adequate Savings Index, it’s encouraging to see the gap finally closed. However, this must come with a health warning, as women remain disadvantaged by persistent inequalities in our society.
“We need to build on this positive step forward and now focus on closing the remaining inequities that impact savings. Pension inequality is not just an issue for women to resolve, structural unfairness affects us all and needs the collective efforts of us all to resolve this persistent imbalance.”
This is not the only research to come out recently which highlights the issue. Yesterday, the Fawcett Society calculated November 18 to be “Equal Pay Day”, which is the day when women, on average, stop earning because of the gender pay gap. The pay gap widens from a “sliver to a yawning gulf” around the age of 40 and according to additional research from Hargreaves Lansdown, in which 10,000 people were surveyed in June 2021, 37 percent of women say they’re either just about getting by or struggling, compared to 29 percent of men.
What can women do?
Sarah Coles, a senior personal finance analyst at Hargreaves Lansdown, warned women will pay the price for the gender pay gap with lower financial resilience throughout their lives. She noted Equal Pay Day falls later this year, because the gender pay gap has widened, with the mean gap for full time employees rising from 10.6 to 11.9 percent.
While this “is likely” to have more to do with furlough rates during the pandemic than a permanent deterioration in women’s pay, it demonstrated the scale of the challenge facing women.
As to be expected, family commitments play a large part in this, as Ms Coles explained: “Interestingly, the pay gap doesn’t widen when people start a family and one of them has parental leave, it comes a few years later. In some cases, it’s when people have second or subsequent children and decide to have a career gap.
“In others it kicks in while the children are young, when the ONS found women are more likely to make career compromises in order to work closer to home. They’re also almost three times as likely as men to work part time.
“This doesn’t just affect pay when women are juggling caring responsibilities, it also often endures if they return to work full time. The ONS found that after the age of 39, more men tend to be promoted into senior management positions, so women may have missed the opportunity to move into layers of management where pay tends to be much higher.
“To compound the problem even further, if more caring responsibilities emerge later in life, possibly as our parents age, the fact that women tend to earn less means they’re often in the frame for this care too. It means they need to make career compromises again, which can hold back their progression even further.”
Hargreaves Lansdown noted while in the long term a societal problem can only be solved by societal change, which takes time and effort, there are some practical steps women can take in the interim to help ensure a pay gap doesn’t destroy their finances.
One of the biggest differences can come from prioritising long term savings and investments earlier in life. However, if this is not possible, there are other steps one can take to improve their position, as Hargreaves Lansdown explained:
- Have early conversations with your partner about parenting, roles and responsibilities, so you both understand each other’s expectations. If you make a career and pay compromises for caring responsibilities, this should be an active choice.
- If you take on caring responsibilities and household income becomes unequal, you need to think carefully how you divide all the expenses. There should be no assumption that the woman should sacrifice her financial goals.
- If you have a career break, talk to your partner about how you will maintain pension contributions. You will have to have a conversation about covering essential bills, so make sure your pension is part of the conversation. If you currently aren’t working, your partner can contribute up to £2,880 into your pension and the Government will top it up to £3,600 in the form of tax relief. This is one of the most tax efficient ways of saving.
- Some couples decide that the parent who isn’t taking a career break will increase their pension contributions to make up for a shortfall in yours. If you make this decision, you need to be clear that it will be split fairly on retirement – or in the event of divorce. If you aren’t married, you will have no right to a share of the pension if you split up, so you need to understand the risk you’re taking.
- If you need flexibility for childcare responsibilities over the long term, you can both talk to your employers about the options. If you both make smaller compromises, neither will be affected to the same extent.
- When it comes to asking for pay rises, there’s mixed evidence on the subject. Studies show women are less likely to ask for a pay rise, but they also show that when they do, they tend to be more harshly judged for it. Don’t let this put you off though. To give yourself the best possible chance of success, do your research to find out what the role is worth, then set up a meeting and explain your case.
- Discuss catch-up pension payments with your partner. If you find yourself with a disappointing pension pot, and you need to play catch-up, talk to your partner about the shortfall. It may be that you need to focus on putting money into your pension for a period, and they may need to pick up more of the household expenses while you do so. It shouldn’t just be you making financial sacrifices at this stage.
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