How to close the gender pensions gap
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A landmark for gender equality was notched up this week when the state pension age for women came into line with men’s at 65, after decades of difference.
The gradual rise from 60 began in 2010, finally reaching parity on November 6.
But there were no fireworks to celebrate the historic milestone. Instead, equalisation day was mired in controversy over the huge “gender pensions gap” separating the retirement income of men and women.
Women retiring today can expect to receive 40 per cent less pension income than men, on average, according to stark figures released by Prospect, the trade union. For the average pensioner, this gap equates to £7,000 per year.
It is not the first study to probe the issue. Which?, the consumer group, last year found that the average state pension income received by women was about a fifth lower than men, while Zurich, a pension provider, found women’s drawdown retirement pots were nearly half the size of men’s.
Driving this gap are the same forces that date back to the time when the contributory state pension was introduced in the 1940s.
Women are still typically paid less than men, with broken working patterns contributing to the gender pay gap and, ultimately, the gender pensions gap.
Societal and policy changes in recent years will see women today receiving a better deal out of the system than their mothers or grandmothers, whose access to workplace pensions was limited, or who were wholly reliant on their husband’s state pension record for their retirement income.
Men taking on more childcare responsibilities today has also reduced the financial inequalities that can arise in relationships when one partner takes on sole caring duties.
But in spite of these changes, there are still plenty of loopholes in the system putting women at risk of poorer retirement outcomes.
For example, millions of part-time workers, mostly female, have been excluded from workplace pensions by a rule which sees only those earning more than £10,000 a year automatically enrolled into the company retirement plan.
The very lowest earners, mostly women, are at risk of slipping into a state pension black hole if their earnings are less than £116 per week as below this level they will receive no national insurance credits towards the state pension.
Unless they are claiming benefits that contain NI credits, they could end up with no retirement safety net.
At the other end of the income scale, middle-class mothers are also at risk of retiring with weaker state pensions due to complex changes to child benefit.
Many higher earning households are no longer claiming this if one partner earns above the £50,000 threshold where tax charges begin to apply on any benefit paid.
But it is little known that by not registering for child benefit, a stay-at-home mother will not clock up crucial credits towards her state pension record.
Currently, 35 years of NI contributions or credits are needed to claim the full state pension, worth about £8,500 per year. As women typically live for several years longer than men, there is a greater need to ensure their state pension records are not patchy.
Some may argue that the gender pensions gap should not be of great concern to women, because it is household income that counts.
If a woman is married to a high-earning breadwinner, and the couple pool their earnings and pensions income, the gender pensions gap is less of an issue. While this approach may work for many families, I don’t think it is terribly sensible to be too heavily financially reliant on a spouse as things can, and do, go wrong in relationships.
There are a number of steps women can take to protect their finances in later life.
First, if you are a stay-at-home mum, make sure that you are registered for child benefit, even if you are not claiming the payments because your partner earns more than £60,000. This is very important for your state pension record. If you have a Government Gateway ID, you can do this online in seconds.
If you’re in this situation, why not ask a higher-earning spouse to pay into a pension on your behalf? Even people who do not earn enough to pay income tax can pay £2,880 a year into a pension, which is boosted to £3,600 with tax relief.
Third, if you work part-time and earn less than £10,000, ask to join your workplace pension. Although you won’t be automatically enrolled, those earning more than £6,032 are entitled to join and receive a contribution from their employer. If you earn less than this, you can still join and pay in, but you won’t get the employer top-up. Private savings are an important buffer against rises in the state pension age. Over time, even small amounts can grow tax-free into a more meaningful sum.
Those resuming a career after their children reach school age should think about maximising pension contributions, which is particularly worthwhile if your employer offers to double match contributions.
If things do go wrong and divorce is on the cards, make sure that pension assets are considered in any settlement.
Age UK, the charity, has warned that many divorced women potentially lose out on substantial sums of money and other assets in retirement because the issue of their entitlement to their husband’s private pension is never raised as part of the divorce process.
Finally, do your bit to raise awareness of all of the above with female friends, colleagues and relatives. One of the biggest criticisms of the equalisation of the state pension age was that women approaching retirement were unaware of the changes. Regardless of gender, we all need to do our bit to reduce that 40 per cent gap.
Josephine Cumbo is the FT’s pensions correspondent
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