Women are being urged to think about their long term savings as research reveals almost five million females in the UK over the age of 50 think they won’t have enough to live on in retirement.
The figures are from a report – Finances after 50 – published by financial services provider SunLife. It comes as a group of women recently failed in a high court appeal to claim compensation for lost State pension income as a result of the increase to State pension age.
The women, all born in the 1950s, and known as WASPI (Women Against State Pension Inequality) will lose out financially because the State pension age for women has risen from 60 to 65.
The WASPI group claim they were not given enough time to make adjustments to their financial plans and many are now facing financial hardship as a result.
In addition to issues with State pensions, the gender pensions gap is also a problem for women in the private and workplace pensions sector. As many as one in three women over 50 don’t have a private or workplace pension compared to one fifth of men, according to SunLife.
What is more, research by the independent research group the Pension Policy Institute shows that, by their early 60s, the average pension wealth of women is worth just one third of men’s.
And a study by Insuring Women’s Futures – an initiative set up by the Chartered Insurance Institute (CII) to throw the spotlight on some of the issues facing women and their financial resilience – reveals the average pension pot for a 65-year old woman in the UK is £35,800, just one fifth of the £175,000+ of the average 65-year old man.
Sian Fisher, chief executive at the CII and founder of Insuring Women’s Futures, says women must think about their financial security and access the information needed to help them with their planning.
She says: “For women to improve their financial futures we need to start talking more openly about the financial consequences of our decisions. Women need to know what action to take to make sure a career break to raise children or care for relatives doesn’t result in a depleted pension pot and impoverished retirement.”
Rebecca Robertson, independent financial adviser with Evolution Financial Planning in London, says: “Women are more likely to take time out of the workplace to look after children or elderly relatives. They are also more likely to work part time and therefore are often paid less over their working life. This also reduces the amount they can save – so pensions tend to be smaller.
“Often women push their own saving down the list of priorities when they are raising a family or working part-time. But women should not take their eye off their own retirement goals.”
There is also a big danger in relying on the pensions and savings of a spouse or partner. SunLife’s survey found 30% of women hope their spouse’s pension will support them in old age, yet women could leave themselves in financial difficulty if they go through divorce or are widowed early.
For ideas on how to improve your long-term financial prospects, read the following information about the various types of pension provision that are available, and how to take advantage of them…
Pensions in the UK
When many people think about pensions, they think about the State pension scheme. There are actually two versions of this: the basic State pension and the new State pension. Your eligibility for each depends on when you were born.
You’ll get the basic State pension if you are a man born before 6 April 1951 or a woman born before 6 April 1953. In other words, if you reached State pension age before 6 April 2016, you’ll be on this scheme.
You’re entitled to the new State pension if you are a man born on or after 6 April 1951or a woman born on or after 6 April 1953.
The new State pension is paid to all workers who have paid at least 10 years of qualifying National Insurance Contributions (those years don’t need to be consecutive). But as the most you can normally receive under the new State pension is £175.20 per week, most people will also want additional savings on top of their State pension to support them in retirement.
This is why workplace and private pension schemes are so important.
These pension are long-term savings with conditions and benefits attached. For example, funds can’t usually be accessed until at least age 55 but you get tax relief on your contributions to boost your savings.
Basic rate taxpayers receive 20% tax relief, higher rate taxpayers get 40% and additional rate taxpayers get 45%. The tax relief is paid on contributions of up to 100% of your annual earnings per year or an annual limit of £40,000 – whichever is lower.
As pensions are long-term savings, meant to grow over decades, they are usually invested in the stock market and bond markets, so this involves risk. But the hope is that over time savers will see better growth compared to cash savings.
Pension managers will often reduce the risk profile of an individual’s pension investments as they approach retirement age.
Employers offer company pensions to their staff as an employee benefit. To help boost provision for employees generally – there is an acknowledged long-term savings shortfall for the population as a whole, not just women – it is now compulsory for employers to ‘auto-enrol’ their staff onto a scheme run according to government rules.
Workers aged over 22 and with earnings of at least £10,000 a year are automatically enrolled into a work scheme, which means employees have to make contributions out of their wages. It is possible to ‘opt out’ of paying into such as scheme, but it is generally agreed that such schemes are good value, not least because the employer must also pay into the individual’s pension, so those who elect not to join are effectively passing up ‘free money’.
With a company/workplace pension, staff pay money from their gross salary each month into the scheme, thereby receiving tax relief on their contributions. The money is invested in stock market-linked funds, government and corporate bonds and other assets, such as commercial property.
I’m self-employed – how should I save?
Personal pensions are offered by investment, pension and life insurance companies and contributions attract tax relief in the same way as company schemes. The money is usually invested in stock market-linked investments, with your savings locked up until at least age 55.
Those more confident about investing could use a self-invested personal pension (known as a Sipp). Investors can select stock-market linked investments, usually unit and investment trusts, alongside other assets to put inside the Sipp wrapper. They are offered by pension and investment companies.
Given the complexity of pensions, anyone contemplating taking out a plan should consider consulting a specialist independent advisor.
Additional retirement planning options
Retirement savings don’t have to just be pensions. Tax-free Individual Savings Accounts (Isas) can be a good place for the self-employed to save and invest, although they are, of course, available to everyone.
Although they don’t offer the tax relief boost available on pension contributions, they are more flexible, allowing access at any time, and there is no tax to be paid on your money when you take it out (income tax is applied on your pension at the point it starts to be paid out, although you can take part of your pension as a tax-free lump sum once you are 55).
The Lifetime Isa (Lisa) is available to anyone up to the age of 40, and you can invest £4,000 each tax year until you are 50. The government adds a 25% annual bonus to your savings, up to a maximum of £1,000 per year until you are 50.
The Lisa can be used by young people to save for a house deposit. But if you are not using the proceeds for a home purchase and you want to save for retirement, you won’t be able to access the money until age 60.
Lisas can be invested in stocks and shares or there are cash accounts available from a number of providers. Shop around for the best rates.
If you don’t meet the eligibility criteria for a Lifetime Isa then a standard Isas can offer a flexible and tax-free way to save long-term. The total annual Isa limit is £20,000. This can be split across different types of Isa focusing on stock market investment or cash.
You could even save £4,000 in a Lisa and put up to £16,000 in a separate stocks and shares Isa each year, for example.
Can non-taxpayers have a pension?
Non-taxpayers can save into a pension – although there are savings limits and a cap on the tax relief. Even if you don’t pay income tax you can save up to £2,880 in a pension each tax year and get tax relief on the contributions up to a maximum total saving of £3,600 per year.
Couples should discuss this issue. If someone has taken time out of the workplace due to caring responsibilities but the partner is working it could make sense to put some of the household income into a pension or an Isa for the person who is not earning – at least until they return to work and resume a work or personal pension.
Pensions aren’t ‘fire and forget’
Do not be tempted to forget about your pension once it is set up. Try to regularly review your pot and work out what your monthly savings mean in terms of future pension income. Is it possible to increase the amount you save each month, for example? Small increases in monthly savings can make a big difference in your final pension pot.
Calculations by financial adviser Hargreaves Lansdown show that, if a 30-year old woman put £100 a month into her pension, with assumed investment growth of 5% per year, she would have a savings pot of £141,000 on retirement at age 68 – which would convert to an annual pension income of £6,530 at today’s annuity rates.
But by increasing her month savings by £50 to £150 she would have a final pension pot of £176,000 by age 68 – and an annual income of £8,160.
Sarah Coles at Hargreaves Lansdown says: “Try to take a proactive approach to your pension. Talk to your employer and the pension provider – ask questions about the scheme and how it is invested. Taking time to engage with your investments and really understand how they work will help you keep on top of your savings goals and make changes where necessary in the future.”
Divorce: know your rights
Pension assets should always be taken into account during a financial settlement in a divorce.
Women should be aware of the high value locked up in an ex-spouse’s pension. Always seek expert legal and financial advice and remember that pensions can be split or shared so you don’t leave yourself without long-term savings.