It’s long been known that women earn less than men, but people are now realising that this inequality stretches beyond the workplace into retirement, thanks to the gender pension gap.
The gender pension gap is the difference in pension income or wealth between men and women in retirement. According to the government, the estimated pension pots of women aged 55 to 59 in 2020 to 2022 was just £81,000, compared to £156,000 for men. This is equivalent to £7,600 a year difference in the amount women have to survive on.
So why does this gap exist? I believe there are three key reasons for it. Let’s look at each in turn, and find out what you can do about it.
1) Women earn less than men throughout their working life
According to the Office of National Statistics, women earn less per hour, on average, than men in all nine major occupation groups. Women are also more likely to work in low-paid sectors like care and leisure, and in administrative and secretarial jobs.
In jobs where men outnumber women, such as solicitors and doctors, there is often a large pay gap in favour of men. Incredibly, there is even a pay gap in full-time primary and nursery schoolteachers, even though five out of six are women.
Even more depressingly, research shows that when when women enter a sector in large numbers, the wages decrease for everyone. A 10% increase in women entering an occupation apparently leads to an 8% decrease in average male wage and a 7% decrease in average female wage in that census year. Over 10 years, this increases to an 9% decrease in male wages and a 14% decrease in female wages. This is known as the ‘feminisation effect’.
As pensions are usually earnings-based, this inequality in salary means women are able to contribute less to their pensions over their working life.
2) Women take more career breaks than men
Speaking of working life, not only do women, on average, earn less than men, but they also are less likely to have an uninterrupted career.
Women are more likely than men to take time out of work for childbirth, childcare and looking after elderly and sick family members (across OECD countries, two out of three family caregivers are female). And many of the years women are absent from the workplace are the prime earning years.
When women do return to the workplace, three in five will end up in a lower-skilled role than the one they held before their career break. Many only return part time, or are forced to work for themselves in order to manage their career around caring responsibilities.
Again, this has a significant impact on their pension contributions. A lower-skilled or part time role will come with a smaller pay packet, and less money to contribute, plus smaller employer contributions. If women earn less than £10,000 a year, they won’t even automatically quality for auto-enrolment into a workplace pension.
And while there are tax benefits to investing in a pension if you are self-employed or run a limited company, there’s no requirement to contribute. According to the Institute for Fiscal Studies, just 16% of self-employed women pay into a pension scheme.
All this means that, again, women are either less likely to have a private or workplace pension, and, if they do, have fewer or lower contributions into it.
3) Women are less financially confident than men
And finally, compounding the impact of earning less and a disrupted working life is women’s lack of knowledge and confidence when it comes to financial planning.
Research by the Money and Pensions Service found that 60% of women have no plan for their money in retirement, compared to 44% of men. And just 41% of women say they understand enough about pensions to be able to make effective decisions about saving for retirement, compared to 57% of men.
As this excellent article from PensionBee explains, the root of the problem is deeper than just pensions; women are generally less likely than men to invest. Research shows that 74% of women are more inclined to save their money, while only 12% attempt to invest. As a result, men have £1.01 trillion invested compared to £450 billion for women.
When I have spoken to friends and acquaintances about financial planning, many say they have left it to their husband or partner, or are relying on them having a larger pension when they retire to bolster the family pot. The problem with this is that you can’t be 100% confident that your partner has made the wisest decisions, or even has invested at all, as one friend found out to her shock when she started divorce proceedings.
Speaking of divorce, the rise in DIY divorces has meant that many women have missed out on pensions when dividing up money and property, simply because they have been overlooked. And if couples are not married, women have no legal right to their ex-partner’s pensions if they split.
Many women also do not know that they cannot inherit their husband’s pension if they are not a named beneficiary, irrespective of what the will may say.
The result of this lack of confidence and knowledge around finances mean that women are less likely to seek out financial advice, more reluctant to make decisions, and at increased risk of paying a huge financial penalty.
Don’t sleepwalk into poverty because of the gender pension gap
The gender pension gap means that too many woman are at risk of sleepwalking into poverty when they retire. So what can we do about it? Sadly, while resolving the global issue of gender pay inequality might not realistic in the short term, here are some steps you can take to protect yourself:
- If you are employed, ensure you are being paid fairly for your role, and if not ask for a pay rise or look for a job where your employers value you.
- If you qualify for auto-enrolment, check your employer has enrolled you. If you don’t qualify you can still ask your employer to enrol you. If you earn over £6,240 a year your employer must also pay into your pension. If you earn less, your employer might contribute, but they don’t have to.
- If you are self-employed or run a limited company, make sure you are paying into a pension for yourself – and reap the tax and other benefits.
- If you have taken a career break to raise children, make sure that some of the family money is paying into a pension for you. And check your National Insurance record to ensure you are on track to receive a full State Pension.
- If you are in a relationship, ensure you are the named beneficiary on your partner’s pension. If you get divorced, know your rights to your husband’s pension (for example a Pension Sharing Order or pension attachment or earmarking order).
- And finally – educate yourself as much as you can about your money and pensions. Understand how much you might need when you retire and check you are on track to meet that figure.
Find out how I went from heading to retirement poverty to building a pension pot of over £460,000 in just eight years.
