Women: 10 ways to get a bigger, better pension
As the state pension age is equalised, Laura Miller lists the steps women should take to get a decent retirement income
The state pension age for women will rise on Nov 6 to 65, the same as it is for men. Millions have been caught out by the change. Telegraph with Kay Ingram of financial adviser LEBC, has drawn up a 10-point action plan that women at different stages of life can use to best prepare for their retirement.
1. Mind the pension gap
Because of the gender pay gap, employers’ pension contributions are on average £47,000 less for women over a lifetime, so their finances are hit twice. While employers must do better, you should act where you can to avoid losing out. If you aren’t automatically enrolled, join the workplace pension and don’t opt out, even if your salary is low at first or your role temporary; it is yours to take with you and £80 paid in by a basic-rate taxpayer equals £100 saved. Higher earners pay £60 to get £100. Staff who earn more than £10,000 and are over the age of 22 are automatically enrolled into a pension within three months of joining the firm. Employers pay at least 2pc into it, rising to 3pc in April.
2. Plan to die late
Women underestimate their life expectancy by up to eight years, distorting saving plans. They live to 83 on average, 3.7 years longer than men, and need about £13,400 a year for expenses, or a total of £49,600 more than men. Plan for a long life.
3. Get a fair divorce
Divorce rates fell last year for every age group except the over-60s. For older couples, pensions can be more valuable than the home.
Courts can order pension sharing in divorce; the spouse with the bigger pension, usually the husband, must transfer some to the ex-spouse. But three quarters of divorcing couples fail to take pensions into account. Separating couples should consult a specialist solicitor accredited with Resolution, a lawyers’ organisation, as well as a financial adviser.
4. Avoid the career break trap
More women are paying into a pension than ever, but saving has dropped among those aged 35-44, a group likely to be raising a family. Pregnant women can feel pressure to stop their pension contributions in preparation for the end of maternity pay. Don’t – especially as employer contributions are also lost. Saving pennies here costs pounds of pension later.
Once the baby is born, employer pension payments will usually continue while statutory maternity pay is received. With salary sacrifice pensions, employers must pay in for the entire maternity leave, even after statutory payments stop.
Keep saving during any career break and rejoin your work pension on return. Even if part-time and below the auto-enrolment threshold you will benefit from tax relief. Some companies offer returners a tax-free pension bonus.
5. Take charge of your pension
Keep track of your pension savings; a third of women don’t know the value of theirs. Most modern pensions can be used for life to let you and future employers pay in. Consolidating pots can help and tends to incur lower charges. Older, final salary pensions are less flexible but very valuable.
Pay for a pension review from a regulated financial adviser. Over50s can also get free guidance from Pension Wise.
6. Beware state pension shortfalls
To receive the full state pension you need 35 years of National Insurance credits. Career breaks or time abroad can cut your entitlement, but if you’re not working and claiming carers’
allowance or parents’ child benefit, NI credits are covered.
Higher earners who waive child benefit must still register for it or the unemployed parent, often the mother, loses the NI credits, which can only be backdated for three months. Where earnings are just over the high income threshold, pension contributions via salary sacrifice can restore child benefit, and so NI credits. Anyone with a state pension credit shortfall can buy up to six years extra – worthwhile as the cost equates to less than two years of the extra pension bought.
7. Take some calculated risk
Men’s average pension pot is £212,000. Invested at a 3pc return, it gives an income of £6,360 a year. For women the pot is just £132,000, requiring riskier investments returning 5pc to match men’s income. But studies show that women are more risk averse, so likely to be stuck with less.
Review your investments regularly. Are you on track or are you being too cautious? Inflation eats at the value of cash, so holding too much is costly.
8. Talk about money
Understand your household income and outgoings, especially if you are financially dependent on your partner. At 55, saving £240 a month for 20 years could build up more than £71,000 to fill the income gap should you survive your partner.
9. If you live together, get hitched
Unmarried cohabitees do not get state bereavement payments, even if financially dependent on their partner. Some private pensions will also not pay out. If your partner dies without a will you could be left with nothing. The spouse exemption from inheritance tax also won’t apply so if they leave you assets of more than £325,000 a 40pc charge will be due on the excess. Getting married solves many of these issues.
10. Plug the gap
The “pension freedoms” give over55s the right to draw on their private pension as they wish. This can fill the gap between retirement and the state pension age, so build up your private provision; £100 per month invested over 22 years could provide the same as three years’ state pension.