Getting a better return on your income, savings and pension
Working women, whether they are employees, middle managers or entrepreneurs, can maximise and protect their income, pensions and investments by having in place a financial plan, writes Gabrielle Monaghan.
Financial independence for women has come a long way in the last five decades. Until the 1970s, a woman couldn’t even get a department store credit card, never mind a mortgage, without a man’s signature – even if she was the breadwinner. Once married, her husband could sell the family home without her consent.
Today’s high-flying women have no such worries and can be the sole architect of their financial future, if they so wish. But it’s not all plain sailing: women have to pay greater attention than men to financial planning and saving for retirement if they take time out from the workplace to have children. This means less time and money to contribute to savings and a private pension.
In addition, the increase in female life expectancy has been dramatic, from 61 years for girls born in 1940 to 82.8 years in 2010. Because women live longer than men, on average, they will need a larger pension pot than their male counterparts on which to live in old age, says Trevor Booth, head of member consulting at Mercer.
A woman who currently retires at 65 will live three years longer than a man. Booth says: “If you are trying to provide yourself with a particular level of income for your retirement and you have career gaps from having children, you will need to save more during the years you are earning. If a woman has the same financial objective as a man who has worked for 40 years, but has taken a combined five years out to have children, she would need to save more heavily for the 35 years that she is working to get to the same point as a man at retirement age.”
Drawing up a strategy with the help of a financial advisor and reviewing that plan at different stages of their lives can enable successful women to focus their energies on their career or business without money worries niggling at them. This involves identifying, and planning for, short-term, medium-term and long-term financial goals, ranging from paying off debt or a mortgage to saving for retirement, Booth says.
One of the first priorities should be setting up a rainy day fund to meet the cost of unforeseen events. Women who are in employment should generally have three times their monthly take-home pay, whereas self-employed, who don’t have as much state protection, might need up to six times their average monthly income, Booth says. Though interest rates for cash deposits are low, Consumerhelp.ie shows the highest rates for savings accounts. For instance, as of early June, the best-paying instant access savings account for a lump sum of €8,000 was Easy Access Savings Nationwide UK (Ireland), which commanded a rate of 0.76pc.
While it may seem a morbid topic to consider, women with children or other dependents should also have a life insurance plan in place and have drawn up a will so that those close to them will be looked after should a woman die suddenly. It’s also worth have an income protection policy in the event that they can no longer work due to an accident, a health condition, or an injury.
New mothers are especially vulnerable to the gender pay gap, which the European Commission puts at an average 14.4pc, particularly if they reduce their working hours on return from maternity leave. But the pensions gap between men and women is much worse: Mercer research for Ireland in 2014 showed that men’s final retirement pot was, on average, 60pc greater than women’s, primarily because of fewer gaps in service, higher salaries and higher savings rates. Just 35.7pc of Irish women have a private pension plan, compared to 46pc of men, OECD figures found. Women are also much more likely than men to assume they will still be healthy enough to work through old age, according to a national survey published in December by the Irish Association of Pension Funds. Paula Finlay, a financial planning specialist at Davy Private Clients, says when she calculates pension plans for clients in their 30s and 40s, she assumes they won’t be entitled to a state pension by the time they retire because it will be means tested and their net worth would mean the payments would be unavailable to them. Instead, they will be considering a standard or non-standard Personal Retirement Savings Account (PRSA), a long-term personal investment account designed to help people for retirement in a flexible manner. Anyone can set one with a PRSA provider and the plan follows people whenever they switch employers, though self-employed people can also access them. Tax relief can be claimed on contributions to PRSAs, albeit with certain limits.
Finlay says: “If the PRSA is linked to your employer, they will match your contribution, so it’s effectively free money. But the earlier you start on it the better; someone who is 45 years old and aims to have a pension pot of €1m on which to retire at 60 would have to put in twice as much monthly contributions than someone who starts at 25.”
A self-employed woman in her 40s may need to contribute 25pc of her earnings to a pension, depending on whether or not she has other assets such as equity in a venture or property investments, Booth says. She can claim tax relief at the marginal rate of income tax but the 25pc contribution is limited to an earnings cap of €115,000 a year for people aged between 40 and 50.
There are two types of PRSA, a standard one and a non-standard one. The former invests only in pooled funds where the risk is spread across a large number and variety of investments. Non-standard PRSAs offer a wider range of investment product choices, but the risk can be greater.
If you have relative youth on your side, you are likely to get a better return on your money by investing in a non-standard PRSA — as long as you are prepared for your fund to ride the highs and lows over the long term.
If you are trying to provide yourself with a particular level of income for your retirement and you have career gaps from having children, you will need to save more during the years you are earning