It’s commonly known that women are generally paid less than men during their working life, but fewer people are aware that the gender income gap continues into retirement.
A recent survey by Prudential has shown that women retiring in 2012 will receive, on average, £6,500 less each and every year, than men.
To compound the problem, incomes for women retiring in 2012 were at their lowest levels since 2008, whilst retirement incomes for men actually rose.
Part of the problem of course, is that the gender income gap during our working lives, translates into a gap between the sexes in retirement. But it doesn’t necessarily have to be that way, there are practical steps women can take to reduce the gender income gap in retirement.
1. Maximise your State Pension
The flat rate State Pension will start in 2016. Whilst it is probably badly named, because it isn’t actually a flat rate if you have paid less than 35 years of National Insurance contributions, it is certainly a step forward, with women, who may have had career breaks to raise children or who have worked on a part-time basis being some of the main winners from its introduction.
If you are retiring in the next couple of years before the flat rate State Pension is introduced, your income from the state in retirement will be a complicated combination of basic State Pension, a myriad of top up pensions and potentially some other state benefits.
Whenever you reach State Pension age, if you are short on National Insurance contributions it will almost certainly make sense to top them up, the ‘investment’ in making additional contributions will be paid back many times over through a higher State Pension.
2. Join your work place pension
It’s widely thought that fewer women join workplace pensions then men.
This may be due to the fact that women are more likely to work part-time, have fragmented employment histories and have less access to workplace pensions.
If your employer offers a pension, to which they contribute, you should join it at the earliest opportunity. Sure, it might put a strain on your family finances and you might need to cut back on other expenditure, but missing out on your employer’s contributions is the same as giving up free money.
Put it another way, if you can’t afford to pay as much as you should into a pension, can you really afford to turn down free money from your employer?
If your employer doesn’t currently offer a workplace pension they will have to do so by 1st April 2017. All employees earning above a set level, roughly equal to the Personal Allowance (the amount you can earn before paying tax) will be Automatically Enrolled into the scheme and forced to make contributions; your employer will also have to pay in.
Whilst you can opt out if you wish, having your employer pay into your pension is a great opportunity to boost your income in retirement.
3. Your pension is just as important as your that of your husband
Many experts believe that the low wage rises and rising prices, seen over the past couple of years, are two reasons why some women have pulled back from planning for their retirement.
Although perhaps an outdated concept, some retirement experts believe that one reason women generally pay less into pensions is because they typically take care of the household bills, which have risen considerably over recent years, whilst incomes have not kept pace. For many households this has led to expenditure being cut, cue cancelling the pension direct debit.
If you are part of a couple it’s important that both of you have independent pension provision, not only is it more tax-efficient, it means you will have to rely less on your husband’s income in retirement. For single women it is even more important that they make provision for their retirement.
4. Pay into a pension even if you are not working
Not many people know that they can pay into a pension when they are not working, you still get tax relief too, that’s a £20 top up for each £80 contribution; which really is free money, because you didn’t pay the tax in the first place!
Family commitments often mean women have more breaks in their employment history, reducing pension contributions. Of course it needs to be affordable, but if it is possible to keep pension contributions going during breaks from employment it is usually a good idea.
Not only will you get ‘free’ money in the form of tax-relief, the contributions made when you are young are the ones which will be invested for the longest period of time and therefore have the biggest impact on your retirement planning.
5. Consider alternatives to pensions
Saving for retirement doesn’t have to mean taking out a pension, in fact the very word often puts people off!
If you have the option to join a workplace pension, to which your employer will contribute, we would always recommend you join it. But if you want to put more money to one side, you could use an ISA (Individual Savings Account) as an alternative to a pension. Of course you wouldn’t get the tax-relief, to which pensions are entitled, but ISAs are certainly more flexible and any income you take from the plan in years to come will be tax-free.
6. Make good decisions when you retire
Building up money in a pension is only half the story. When you come to retire you have to turn it into an income, which involves a complicated series of decisions that will affect your income for the rest of your life.
Although other options are available, for most people, turning a pension into an income usually means buying an Annuity and there are plenty of things which can be done to boost the rate you will get.
Firstly, always shop around for the best Annuity rate. Secondly, never take the first Annuity offer from your existing pension provider, without looking at alternatives. Thirdly, check whether you qualify for an Enhanced Annuity, which will give you a higher income after taking into account any health problems you might suffer from.
Finally, take advice from an Independent Financial Adviser, who can shop around for you, has access to Annuity providers the public can’t use directly and will haggle for the best rate, whilst making sure that an Annuity is right for you in the first place.
Reduce the gap
Reducing an average gender income gap of £6,500 to a point where men and women have the same incomes in retirement will take many generations. But whether you are young and in your first job, a working mum, climbing the career ladder or close to retirement, there are practical steps you can take right now to improve your income in retirement.
Of course we are here to help.
Our team of Independent Financial Advisers are experienced in developing retirement income strategies for clients the length and breadth of the UK. If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk
