Women who pay 1% more a month can close pension gender gap

2 July 2018

Even if young women paid into their pension schemes, in line with government auto-enrolment contributions, they would still end up with a pot worth close to 11% less than their male colleagues.

This was the conclusion of a ‘state of the nation’ report into women and pensions from investment firm Fidelity International.

It found that a man currently aged between 25 and 34 is likely to have a pot worth £142,836 when he reaches age 68 – his state pension age. However, a woman of the same age is only likely to have amassed £126,874 when she reaches the same milestone.

Fidelity blames this on the ‘motherhood’ and ‘good daughter’ penalties – by taking time out of work at each end of their working life, women are likely to pay less into their pensions. This problem is then compounded by the fact that for the years they are working, women are likely to earn less than men too.

£35 a month to close the pension gender gap

However, the report, ‘The Financial Power of Women’, says that while women may be at a disadvantage, savvy investors can close the gender pension gap. By investing an additional 1% of their salary into their pension during the early stages of their career, their pots will get the chance to catch up.

This works out as an additional £35 a month over 39 years.

However even though extra contributions could effectively close the pension gender gap, Fidelity’s research found that women are unlikely to engage with their pensions. More than half (52%) do not know where their pension is invested, while 37% do not know what it is worth.

Fidelity also found that when saving into Isas, women were most likely to plump for lower-risk cash accounts, while men typically favoured stocks and shares accounts. However, numbers crunched by Fidelity show that if women had invested their Isa allowance in stocks and shares over the past four years, the value of their account would have risen by 25%, compared to a 0.44% return if left in cash.

Maike Currie, investment director at Fidelity International, says: “Financial inequality is one of the greatest challenges we face today. We live longer, earn less and are more likely to take career breaks or work part-time. To unlock the financial power of women, we need to address the personal, professional and policy barriers stopping women from investing. On a personal level, women still shy away from risk and prefer the perceived safe haven status of cash.

With one in 10 women saying they do not feel comfortable selecting financial products, Ms Currie also says that that the financial services industry has a challenge to make investing more accessible.

“On a professional level, the investment industry needs to do more to build trust and an understanding of their products and services among women,” she adds.

Commenting on the results, Moira O’Neill, head of personal finance at Interactive Investor (Moneywise’s parent company) says: “I don’t think women need ‘pink’ brochures or female advisers. Women, like men, just want jargon-free friendly communications, and the investment industry hasn’t been good at that.  In a historical context, women typically tended to defer investment decisions to their partners, but it is increasingly important for women to have their own accounts, both from the perspective of financial independence as well as for tax reasons. 

As Ms O’Neill points out, even those who aren’t working can pay up to £3,600 a year into a pension and get 20% tax relief, meaning that initial investment will only actually cost £2,880.

 “As everyone has their own personal allowance, it makes far more sense to have both partners in a couple generating some income in retirement rather than relying on just one,” she adds.

However, while the Fidelity report suggests some women may not feel confident making these decisions, Ms O’Neill urges them not to delay. “Don’t put it off until you think you have more money or know enough about investing to feel more confident. The process of starting will give you confidence. I recommend looking up some graphs on what a difference it makes to the outcome if you wait even just 10 years. That should work as a kick up the backside!” she adds.

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