UK Families | April 5, 2024

Mind the pension gap! – The importance of retirement planning for female investors

Written by Emma James, CWM

Planning for the future can often seem a daunting task, especially when it comes to finances. There are many variables to factor into modelling your future costs and cash flows, and so knowing where to begin can be challenging. However, financial planning, and understanding how your assets are structured to meet your future needs, is essential to a comfortable retirement.

These are, of course, important considerations for every individual; however the need for sensible planning can be even more important for female investors. You may well have heard of the gender pay gap before, but the lesser-known gender pension gap can have even more significant consequences. The gender pension gap is defined as the difference in income women can expect to receive in retirement versus men. This gender pay gap in private pensions is currently estimated at about 35%[1] according to the Department for Work and Pensions. To put this into monetary terms, women are on track to have an average of £148,000 in their pension pot at retirement, which would pay c. £5,000 in annual income based on today’s annuity rates. In contrast, men can expect to have private pension assets of £234,000 at retirement age, which would pay c. £8,000 in annual income[2]. Furthermore, women generally have a longer life expectancy than men and so the difference in income is felt over a longer period.

There are many contributing factors to the differential in pension savings, but there are also many proactive steps one can take to ensure financial health in preparation for retirement.

Starting Early

Making contributions to your pension early in your career and investing these sensibly can allow you many years of compounding, tax-deferred growth. Compounding returns accelerate the growth on your pension contributions so that over time the total of your pension should be much greater than the sum of the contributions. The longer that you can subject your pension to these compounding returns, the better, and so this is why starting early can be key to reaching your long-term goals. Even starting with a small sum is better than not starting at all, and so whether it be your own pension, or that of your children, this could be something to consider right away.

Maximising your contributions

It seems logical but making the maximum allowable contribution into your pension can also be important to ensure you have sufficient savings to fund you through retirement. The current UK annual pension contribution allowance is £60,000 however this might be reduced depending on your salary. You can also potentially make catch-up contributions for the previous 3 years if you did not contribute the full allowance, which can further add to your pension pot. There are many factors that might alter the value you can contribute to your pension in any year, and so we would recommend speaking to a professional to ensure you are making the most of your tax allowances, particularly if you are a UK and US taxpayer. This can add levels of complexity across two tax jurisdictions, and so managing the taxes on both sides of the pond is important to maximise your pensions and tax positions.

When considering planning for female clients in particular, making maximum allowable pension contributions is important as there are still planning opportunities in years of reduced employment earnings. Women may take time away from full time employment to start a family, and statistically women are more likely to reduce working hours to provide childcare or care to elderly parents. Continuing to make pension contributions during these times can really help in reducing the pension gap. Under the current rules, in a year where one has no employment earnings, pension contributions of £3,600 gross can still be made, and so even if one is not earning, there are still allowances available to assist in meeting retirement goals. In addition, you may be able to make voluntary national insurance contributions to ensure you qualify for the UK state pension, or to increase the expected benefits you might receive. Again, speaking to an advisor will allow you to ensure you are taking advantage of the tax-efficient retirement planning strategies that are available to you in any scenario.

Utilising other savings strategies

Pensions are excellent vehicles when saving for retirement, however depending on your level of wealth or earnings you may not be able to make significant contributions into these vehicles to fully cover your liabilities through the rest of your life. As such, it is important to consider broader investment strategies and holistic wealth planning to ensure that you are structuring your investments appropriately to meet your wealth goals. Whether these retirement goals are remodelling the house, luxury yacht holidays or simply continuing the lifestyle that you have had during employment, modelling your future cash flows, and expected returns can be key in determining the correct level of risk across your investments. Taking a structured approach to saving and investing through the accumulation phase of your life can position you to meet your wealth goals in retirement, whatever they might be.

When looking at the statistics on the gender pension gap it is easy to be disheartened. That being said, there are sensible planning and savings strategies that one can implement to assist in funding retirement. By starting to save as early as possible, maximising the tax allowances available to you and implementing holistic wealth planning, one can be confident that retirement spending will be accounted for. A robust savings and investment strategy is key in meeting your goals, and tailoring this to your specific needs will allow confidence that funding your expenses in retirement could (quite literally!) be plain sailing.

[1] https://www.gov.uk/government/statistics/gender-pensions-gap-in-private-pensions/the-gender-pensions-gap-in-private-pensions
[2] https://adviser.scottishwidows.co.uk/assets/literature/docs/61096.pdf

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