It's never too early to plan for retirement
With women enjoying greater financial independence than ever before, you would think more could look forward to enjoying their retirement. But instead, the gender divide is as wide as ever when it comes to having enough money to live on in old age. According to charity Age Concern, one in five women faces poverty in retirement, while figures from the Department for Work and Pensions show that just 30% of women qualify for a full basic state pension, compared to 85% of men.
So while many women are in better jobs and earning better money than their predecessors, erratic working lives, including time out to raise a family, mean many face a bleak financial future. Women are still far more likely to be in lower-paid and part-time work than men, so they also have less opportunity to make substantial contributions to company pension schemes.
Considering the high rate of marriage breakdowns, becoming financially dependent on your partner is a risky approach to retirement, as you could, at worst, find yourself destitute.
But women can't rely on improvements to state pensions announced in the Pensions Bill, currently making its way through parliament. This includes measures to improve the situation, such as a cut in the number of years women need to build up National Insurance Contributions (NICs) to qualify for a full state pension to 30, and the restoration of the pensions link to earnings.
However, for many these changes will be too little, too late. By 2046, women will have to wait eight years longer than they do today to start claiming their state pension, so anyone wishing to stop work earlier than this will need to have built up significant pension savings of their own.
But the good news is that there are several simple steps you can take to turn things around. Here's a guide to what you can do, at whatever age you are, to ensure you can look forward to enjoying your autumn years.
20s and 30s
Over this period, there's a good chance you'll be more concerned with tackling debt and getting a foothold on the property ladder than arranging any pension planning.
If you are in a relationship, try and keep some savings and accounts in your own name rather than holding everything on a joint basis, so you can build up a separate pot of savings.
The sum you put away should be whatever you can spare, no matter how small. If possible, try to pay thestakeholder limit into your pension, of £3,600 gross or £2,808 before tax a year, as this will give you a good start. Contrary to what you may think, stakeholder pensions are available to anyone regardless of whether they are working or not.
If you start saving for a pension at the age of 20 you would need to put away £270 a month in order to end up with a pension of £45,500 a year at retirement in 45 years' time, calculates Peter Quinton, sales director of retirement specialist Living Time. This assumes investment growth of 6% after charges.
If you wait until the age of 30 to start pension saving, you would need to put away £400 a month to end up with a pension income of £15,000 after inflation, whereas a man would need to save £360 a month to end up with the same income.
With many women leaving motherhood until later, the time to start saving into a pension scheme is before that stage.
If you take a career break to raise a child you can either maintain your pension contributions or take a payment holiday while on maternity leave.
Of course, retirement planning is not just about pensions. Any savings plans, property and investments may all form part of your long-term portfolio.
If you can, use your annual tax-free ISA allowance, of either £3,000 for a cash ISA, or £7,000 for an equity ISA (£3,600 and £7,200 respectively from next April). If you are married, use your allowance as well as your husband's to double the limit to £14,000, or £14,400 from next year. Building up two pension pots will also mean you effectively double your income tax allowance in retirement.
Similarly, it could be a good idea for your partner to either make or transfer savings and investments into your name, particularly if he is a higher-rate taxpayer and you are not.
When it comes to company pensions, women who are working and have access to a company scheme would be mad not to join it, as most employers will make contributions.
If you have yet to start a pension, take action now.
If you are successful and working and are paying too much tax, then a pension can be a useful tax-planning tool, with up to 40% tax relief available on contributions.
Remember, you have no legal entitlement to your husband's pension if you divorce.
You should also get an update on your state pension entitlement from the Department for Work and Pensions, advising them of your period of marriage and the date of divorce.
The key thing to remember is that it is never too late to get informed and take action to secure your own financial arrangements.
As you approach retirement, take time to review your existing pension arrangements.
Protect the pension fund from any sudden drop in the stockmarket and help to preserve the money you have already accumulated. You can't usually get at the money in your pension fund until you are 50 - and the age limit is rising to 55 in 2010.
This may be the time when your mortgage is paid off and the kids have left home, and so you have a bit more income to put into a pension plan. Retirement provision means not only your pension scheme but also any savings, investments or additional properties you have previously accumulated.
Historically, women in their 50s have been at a disadvantage, because they generally stayed at home to raise children and didn't have much pension provision in their own right.
If this applies to you, check your entitlement to the basic state pension, using form BR19 from the Inland Revenue. You can pay Class 3 voluntary NICs to help you fill in any gaps and qualify for a higher state pension. You can pay them if you are not liable to pay contributions, because, for example, you are earning below the £87-a-week threshold. But you cannot take this route for any tax year that, as a married woman or widow, you paid the small stamp.
If you are married, ask your husband to check his pension policies. Some may only provide an income for you if he dies, so it may be worth him taking out life insurance.
If you have other assets which you are using as part of your retirement planning, you may wish to consider altering these so that they will now produce an income for you.
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.
Tax-free lump sum
An inelegant phrase that is nonetheless accurate in what it describes: a one-off payment to a beneficiary that is free of any form of taxation. Usually received when using a pension fund to purchase an annuity, as 25% of the overall fund can be taken as a tax-free lump sum.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
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.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.