It’s well documented that women in the UK are on average paid less than men, with a gender pay gap of 15.4% in 2021, according to the government. But the gender pension gap is even bigger. If you’re a woman, the trade union, Prospect, reckons currently you get just £6.20 of retirement income for every £10 that the average man gets. What can women do about this and what should the government do to make the system fairer?
Why women are short-changed
To be comfortable in retirement, you need to save up for your own private pension to top up what you can get from the state – I’ll come back to the State Pension in a moment. For most people, earnings from work are the basis for saving for a private pension.
As a woman, you’re much more likely than a man to shoulder the unpaid work of caring for children and frail relatives. This means you probably have periods when you’re not working at all or working part time. Alternatively, you might have the dilemma that one of my daughter’s new-mum friends faced – put her career on hold or find an eye-watering £11,000 a year to pay for a full-time nursery.
If you do manage to get back to working full-time, you may find that trying to juggle children and work can hold you back from promotion and higher pay, either from your own choice or because you are seen as less dedicated to your job than colleagues without caring responsibilities.
In fact, the gender disadvantage can start even earlier with gender stereotypes influencing women to pursue caring-type careers, such as nursing and teaching, which tend to be undervalued and underpaid. Such stereotypes are changing, but slowly.
So, the gender pay gap that stems from part-time and lower-paid work feeds through to the gender pension gap, made worse by career breaks. As a result many women rely on a partner to build up the couple’s pension savings, but this is a vulnerable position to find yourself in. If your relationship later breaks down, you may lose your share of those joint pension savings. If you’re not married or in a civil partnership, then you have no automatic legal rights to claim part of your ex’s pension savings. If you are in a formalised relationship, then you do have rights but a common split of assets on divorce, if you have children, involves you keeping the family home while your partner takes the pensions. That may be fair, but it still leaves you starting your pension savings from scratch.
~Novel Serialisation: Heavens Fire~
Don’t workplace pensions help?
In 2012, a system of ‘automatic enrolment’ into pensions was introduced. As a result, if you work for an employer and earn more than £10,000 a year, you are usually automatically made a member of a pension scheme at work – though you can opt out, if you want to.
Provided you stay in the scheme, your employer must put some money in on your behalf – currently at least 3% of your earnings between a lower and upper limit. You must usually pay in too – often 4% of those earnings – and the government tops this up with tax relief of 1%. So, an amount equal to 8% of your pay between the lower and upper limits goes into your pension savings pot.
The problem for women is twofold. First, paying in 8% is certainly better than no saving, but it’s not enough to generate a big retirement income. For example, I estimate that, if you were on average full-time earnings of just under £32,000 a year, after 40 years you’d have enough in your pension pot to provide you with a pension of around £5,600 a year in today’s money. The higher-paid jobs that usually come with more generous pension schemes are those that you may miss out on because of your caring responsibilities.
The second problem is the earnings threshold for automatic enrolment. If you earn £10,000 or less, your employer doesn’t have to automatically enrol you into the workplace pension scheme, and many women in part-time work simply don’t reach that threshold.
What can you do to improve your pension prospects?
There are no easy solutions, but there are some things you can do to improve your chances of building up a better private pension.
First, if you are in work and earning more than £10,000, don’t opt out of your workplace pension scheme. That’s equivalent to turning down part of your pay packet.
Moreover, what is often overlooked is that, even if your pay is below the £10,000 threshold, as long as you’re earning at least £6,032 (2022-23 tax year), you have the right to ‘opt in’ to the workplace scheme. To do this, write to your employer.
If you have a partner, it’s important that you discuss pensions with them and, if possible, get your partner to help. For example, anyone can take out their own pension plan usually with an insurance company, but did you know that anyone can also pay into such a plan for someone else? So, you could start a pension plan in your name into which your partner pays contributions, say, during the years that you’re doing most of the family’s unpaid care work. The maximum your partner could pay in on your behalf would be £2,880 a year – and this would be topped up by tax relief from the government taking it to a maximum of £3,600 a year. Contact your chosen pension provider to set this up.
Ideally, you should also negotiate with your partner to share child and elder care, so that you can cover for each other as necessary and both carry on building your careers and applying for promotions.
You might also think about whether you could run your own business from home which might give you the flexibility to work around your children’s needs and earn enough to start saving. (This is what I did when my children were growing up.)
Finally, don’t feel guilty about prioritising your retirement saving. You might feel that money you earn should be spent on your children and the home, but your later-life needs are important too.
State Pensions: credit where credit is due
A good feature of the state system is that it is designed so you can build up a State Pension even during periods when you’re not doing paid work because you’re caring or you’re working but on low pay.
Normally, you build up your State Pension entitlement by paying National Insurance (NI) contributions while you’re an employee or self-employed. Since 6 April 2016, anyone reaching State Pension age (currently 66) needs 35 years’ worth of contributions to get the full State Pension and a minimum 10 years to get any at all. The full pension in 2022-23 is £185.15 a week which is around £9,600 a year. That doesn’t sound much, but it’s a useful foundation for your retirement income and, on my calculation, you’d need to have a pension pot at age 66 of around £220,000 (in today’s money) to buy that much pension privately.
If you’re not working because you’re caring for a child under the age of 12, you can get National Insurance credits – these count towards your State Pension in the same way as NI contributions. You get these ‘carer credits’ automatically if you’re claiming Child Benefit.
However, if you or your partner has an income above £50,000 a year, some or all of the Child Benefit is clawed back through an extra tax charge and this involves filling in a tax return each year. You might decide it’s easier simply not to claim the Child Benefit in the first place – but don’t do that; instead make a nil-claim for Child Benefit. This means you’ll be on the system and still get that NI credits to protect your State Pension. You can find out how to do this on the gov.uk website.
Similarly, you can get carer credits if you’re looking after a frail adult and meet certain conditions. You’ll get the credits automatically if you’re claiming Carer’s Allowance. Otherwise, see the gov.uk website for how to claim.
The State Pension system also gives you NI credits automatically if you’re working and your income is too low to pay NI contributions, provided you are earning at least £123 a week (£6,400 a year).
What else should the government do?
Penalising women financially for bringing up families makes no sense. The value of unpaid work in UK homes is estimated to be around £1.2 trillion a year, of which childcare is a substantial part. The economy would grind to a halt if this work was not done and there were no workers of the future.
However, unlike the State Pension, government policies regarding private pensions do little to address the gender pension gap. These policies are ‘gender blind’: they seemingly offer the same pension treatment to men and women, but ignore the reality that, as a woman with caring roles, you have less opportunity to benefit from these policies. True gender equality would take account of the differences.
As an example: there are a range of tax breaks notionally available to all when saving through a private pension. In 2017-18 (the latest year for which the government has published data), these tax breaks were worth £35.4 billion in total. However, they are heavily skewed towards higher earners who are more likely to be men for all the reasons I’ve mentioned so far. In fact, the Pensions Policy Institute estimates that 71% of the tax reliefs on the most common types of pension plan go to men.
Bodies like the Women’s Budget Group, of which I am a member, campaign for gender equality and say that the money spent on pension tax reliefs would be better used to fund policies that are fairer to women.
The money saved on pension tax reliefs could, for example, fund:
- more affordable childcare to give women realistic choices about their work, earnings and saving.
- state-funded carer contributions to personal pensions or to build up enhanced state-pensions for carers. These would directly benefit women most, given their traditional caring responsibilities. However, such contributions would also be available to men if they took on more of the unpaid caring work and that could aid women indirectly by helping to break down traditional gendered roles.
So, thinking caps on! How would you re-purpose some or all of the billions from the pension tax reliefs, or what else would you do, to reduce the gender pension gap?
By Jonquil Lowe
Jonquil is editor of the Good Retirement Guide 2023, a member of the policy advisory group of the Women’s Budget Group and Senior Lecturer in Economics and Personal Finance at The Open University.
