Why the pension gap leaves women £136k worse off

The Sunday Times is calling for changes to plug gaps in the pension system. We think employers should be required to contribute a minimum of 5 per cent of an employees’ salary into their pension, up from 3 per cent. Employers should be required to make full pension contributions for 39 weeks of maternity leave. And we also want the amount you can save into a pension for someone who is not working — £3,600 a year — to rise in line with inflation.

• Why it’s time to plug the pension gap

“Women do the majority of the unpaid labour, including caring, which inevitably means they have less time to spend on paid work. As a result, their private pension pots are smaller,” said Joeli Brearley from the campaign group Pregnant then Screwed.

“This isn’t just an inconvenience, it is catastrophic for women’s quality of life.”

Why is there a gap?

Part of the problem is the gender pay gap. The Office for National Statistics said that women in full-time work were paid 7.7 per cent less than men in April 2023.

Women also take an average of ten years out of work to look after children, and take on other caring responsibilities, which costs them about £39,000 in missed pension savings, according to analysis by the PPI and NOW: Pensions.

• 3.6 million Waspi women were waiting for their pension. Here’s what happened

The Institute for Fiscal Studies, an economic think tank, said that ten years after having a child mothers were working for an average of 27.2 hours a week, earning £245, while fathers typically worked 45.3 hours a week and earned £612.

As women get older the pension gap widens. The insurer Legal & General looked at the pension pots of customers aged between 20 and 65. At 30, women’s pensions were an average of 14 per cent smaller than men’s. At 50 women’s pensions were an average of 39 per cent smaller and by 65 it was 55 per cent.

“Women do the lion’s share of caring for children, leaving them worse off in retirement. They are also less likely to hold senior positions and are being paid less, resulting in lower pension contributions,” said Katharine Photiou from Legal & General.

Childcare costs mean that some mothers feel it is not worth returning to full-time work. The average cost of a full-time nursery place for a child under the age of two was about £286 a week last year, or £14,836 a year, according to the children’s charity Coram. In inner London, the most expensive region in the country, it was £394.58 a week.

“A lack of access to affordable childcare makes it harder for women to remain in high-quality employment while raising a family,” said Jackie Leiper from the insurer Scottish Widows.

Grace Abell and her twins Oliver and Henry

‘Having twins threw my savings plan off track’

Grace Abell wanted £100,000 in her pension by her forties, but then 18 months ago she had twins.

“I was a self-employed graphic designer with a thriving business, but I had to stop working almost entirely when I had twins because of childcare costs, which would have been £140 a day and unmanageable for us,” said Abell, 34, from Newcastle.

She now works in the evenings when Oliver and Henry are asleep, but finds it hard to save consistently because her earnings have fallen more than 50 per cent. Some months she is able to add £300 to her pension and other months nothing. Last year her husband Joe, 33, gave her about £1,500 to put in her pension when he got his annual bonus.

“He helps when he can. We have talked about him contributing to my pension regularly, but he is already covering lots of expenses. He pays for the mortgage, all the bills, all the food. I am very dependent on him,” Abell said.

She has about £15,000 in her pension, a long way off where she had hoped to be. “I don’t beat myself up over it because life rarely goes to plan, but it’s something I am very aware of,” she said. “I’m lucky because Joe and I share everything, but it would be nice to have some savings of my own.”

• The families who fear they may never be able to retire

The power of an extra 2%

Anyone over the age of 22 who is earning more than £10,000 a year from one job is automatically enrolled into a workplace pension scheme. Most workers get the equivalent of at least 8 per cent of their salary paid into a pension pot — 5 per cent from you and 3 per cent from your employer.

At these levels, a woman on the average female salary of £26,878 in 2022, who started saving into her pension at 25, could expect to have £306,377 at 65, according to the investment firm Fidelity. That figure is based on pay rises of 2 per cent a year and investment growth of 4.25 per cent a year.

A one-year career break at 27 would shave about £11,946 off the value of her pension pot, Fidelity said. If the same woman had the equivalent of 10 per cent of her salary paid into her person she would have £382,972 at 65. A one-year break at 27 would leave her £14,933 worse off, but she would still be £61,662 better off than with an 8 per cent contribution and no break.

• A complete guide to pensions

The Pension and Lifetime Savings Association (PLSA) suggests that you need income of £31,300 a year after tax for a “moderate” retirement, which would allow you to spend about £200 a month on food — groceries, takeaways and eating out — and a two-week European holiday a year. Couples would need £43,100 post-tax income, the association suggests. An increase in employer contributions would help many workers achieve this.

The PLSA said that four out of five workers were not saving enough for a moderate lifestyle. A single person would need a private pension pot of between £300,000 and £500,000, assuming they were entitled to the full state pension, which will be worth £11,500 a year from April, and had no housing costs, such as rent or a mortgage.

Holly Holland with her husband, Neil, and children, Teddy, four, and Woody, seven

‘I lost out on thousands’

Holly Holland thinks more should be done to show women how maternity leave will affect their pensions.

“When I took time off to have children I did not fully understand the implications,” she said.

Holland, 34, took a year off when each of her children Teddy, seven, and Woody, four, were born. She stopped paying into her pension, meaning she missed out on about £1,440 of contributions in total although her former employer continued paying into her pension for 39 weeks giving her £673 a year each time she was on maternity leave.

“It would have been a big problem if that had not been the case. It might look like you are only missing out on a few hundred pounds but that can turn into thousands by the time you retire because of compound interest.”

Holland, who runs a financial app called Financielle, has £30,000 in her pension, but worries that she will not have enough to retire comfortably. “It would help companies retain staff if they were more vocal about maternity policies and what it means for people,” she said.