Women: protect yourself from pension shortfalls
Life expectancy in the UK is at its highest level on record for both males and females, with a newborn baby boy likely to live for 77.2 years and a newborn baby girl for 81.5 years. Yet despite women being, on average, likely to survive for four years and three months longer, the fact remains that when it comes to retirement women should expect to have less pension income than their male counterparts.
New research from Prudential reveals that the 2.76 million planning to retire in 2009 can expect to receive an average annual pension of just £13,671 - £6,642 less than the average man’s annual pension of £20,313 and equivalent to a collective income shortfall of more than £42 billion.
As a result of these pension shortfalls, an increasing number of women now plan to work beyond the age of 65, even though the standard female retirement age is 60.
"It's still a shock to see so many women retiring at such a disadvantage to their male colleagues, despite all we know about the causes of pension discrepancies between men and women," said Karin Brown, annuities business director at Prudential.
In this day and age it's hard to understand why many women get such a raw deal when it comes to pensions. Taking time out of work to raise a family or care for sick relatives are key reasons. In addition, women earn 17% less, on average, than men, according to the Office for National Statistics.
Laith Khalaf, pensions analyst at Hargreaves Lansdown, says: “Part of the problem is that women do tend to be paid less than men, and in addition many give up work for several years to raise a family. This leaves a gap in their private pension contributions and can leave them financially weaker come retirement.”
Women’s pensions can also suffer as a result of marital breakdown. "The divorce rate which has climbed over the past few decades is expected to keep rising, so we could see an increase in the number of divorced women without a spouse's pension to fall back on," says Brown.
During the divorce process, the parties involved (or the Court) will decide a "fair" split of assets - including pensions.
"For emotional reasons, many women settle for the family home and give up their right to their partner's pension," says Matt Pitcher, a wealth adviser at Towry Law. "This is dangerous, as many find they have neglected their retirement needs, and unable to downsize their home down the line."
Whether you are nearing retirement age, planning to start a family or in the early years of building up your retirement savings, there are steps you can take to ensure you don't lose out to the gender gap and have enough money built up to see you through your twilight years.
Women have long got a raw deal from the state pension, with less than a third eligible to claim their benefit. However, the government has made moves to try and reduce the gender gap.
Currently, you need to make 39 years of qualifying years of paying National Insurance to be eligible for the full state pension, but from April 2010 this will reduce to 30 years for both men and women.
You can get your state pension forecast from The Pension Service. If you won’t quailfy for the pension, then you could consider buying back any missing NI contributions.
An amendment made in October 2008 to the Pensions Bill, means women can now buy up to an additional six years of voluntary NI contributions on top of their current allowance. However, there a several factors to take into account before you do, so seeking professional advice is recommended.
Khalaf says: “The government’s Home Responsibilities Protection scheme automatically protects your entitlement to a state pension even if you aren’t working and claiming child benefit or income support because you are a carer.”
Home Responsibility Protection works thus: when judging your eligibility for the state pension, the number of years you were part of the scheme are deducted from the number of qualifying years needed to calculate your pension.
However, women claiming carer’s allowance are not eligible for Home Responsibility Protection. Plus, for it to add any value, you must claim under the scheme for a full tax year from April to April. “So July to July, for example, would not count,” explains Brown.
Taking a career break
If you do give up work to care for children, an elderly or sick relative or even because of unemployment, then you can still keep up any company or private pension contributions – either out of your own money (such as savings) or through your spouse of partner.
People not earning an income can still save up to £240 a month (£2,880) into a private pension, and the law states that someone else can pay this money on your behalf through direct debit. This money is then topped-up (by up to £720 a year) by the government, allowing you to save up to £3,600 in a pension per annum.
“I still see many clients where the majority of pension assets have been built up in the husband’s name,” says Pitcher. “But it’s very important to try and balance assets between both parties – partly because you receive double the amount of tax-free allowances but also because this is the fair thing to do.
"Just because the wife (or in some cases the husband) gives up work to raise a family, doesn’t mean she should suffer in retirement.”
However, there are some considerations to make because you consider paying a pension on behalf of your spouse or partner. If you are a higher-rate taxpayer then you’ll be used to receiving 40% tax relief on your own pension contributions – but contributions into someone else’s pension won’t benefit from this tax relief as the money is taken from your pre-taxed income.
“The tax relief isn’t applied to the person paying into the pension – instead, it’s the person in whose name the pension is,” explains Pitcher. So, if your partner is a basic-rate taxpayer then they will only receive 20% tax relief on their pension.
“If both parties are basic-rate taxpayers, then I absolutely endorse them considering splitting the earner’s income into two pensions,” says Pitcher.
As well as building up a pension for your non-working spouse or partner, contributing into someone else’s pension is tax-efficient when it comes to retirement.
“When you hit retirement at 65, both parties have a tax-free allowance of £9,000,” says Khalaf. “If all or most of the pension is only in one person’s name, then you won’t benefit from your partner’s £9,000 allowance. If the pension funds are split, then as a couple you effectively receiving £18,000 tax relief.”
Neglecting pension savings
According to Prudential, 61% of people retiring this year doubt their pension and other savings will provide a sufficient income to enable them to enjoy a comfortable life in retirement.
"The underlying problem that many people have insufficient pensions is never going to go away unless men and women start saving for their pension much earlier in life, ideally in their twenties or thirties," says Brown.
She recommends women start a pension at an early age to lessen the impact of career breaks in later life: “It will also mean people can feel confident that they are going to have enough money to live off when they do come to retire, and this is vitally important for women who expect to receive smaller pensions than men."
There is also a concern that many people simply do not save enough in a pension.
A rule of thumb is for people to try and save half of their age as a percentage of their salary into a pension scheme. So, someone aged 25 should aim to save 12.5% of their salary, rising to 15% when they hit 30 and 20% when their 40th looms.
Drawing an income from your pension
Another way to ensure your pension stretches as far as possible is to ensure you shop around for an annuity (a pension income product) from across the whole of the market. Your pension provider will write to you with its own offering, but you should compare this to other annuities on the open market.
Despite every retiree having the right to shop around for an annuity product – known as the Open Market Option (OMO) - around two-thirds of people still accept the first offer made to them by their pension provider.
If you are couple, you could also consider opting for a joint life annuity. This means that when one of you dies, the other will be able to continue to draw an income from the annuity.
“Unless your spouse has a decent pension provision in their own right, it is worth looking at joint life annuities,” says Khalaf. “Although the income you receive will be less, because the provider knows it will potentially have to pay out for longer, this is a good way to ensure your other half is provided for after you die.”
Open market option
People who have a money purchase or defined contribution pension, at retirement must use their fund (minus an optional 25% as tax-free cash) to purchase an annuity. As the annuity market is very competitive and rates differ vastly between annuity providers on a daily basis, the open market option is your right to shop around and buy the annuity from the company offering the highest rates at that time.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.