We’ve talked a lot in recent months about pensions – on our blog, and with clients.
Whether it’s chasing up ‘lost’ pension pots, checking your state pension forecast, or making sure your National Insurance contributions are up-to-date, we want to make sure you’re getting maximum value when you retire.
But there’s one area we’ve not featured so far, and it’s really too important to let slip under the radar. The Gender Pension Gap.
If you’re a woman, your final pension sum, on average, is likely to be much lower than a man’s. One estimate is that a woman will have to work full time for an extra 18 years just to get parity.
International Women’s Day is just around the corner on 8 March. The deadline is also approaching for big companies to publish their gender pay gap data. So, we think it’s the right time to look at this issue in more detail, and how it could impact your pension.
The causes? It starts with equal pay
Although the difference between women and men’s earnings has declined, men in the UK still out-earn women by 14.9%. More men are in senior roles; more women tend to take career breaks – for example to look after children (leading to the so-called ‘motherhood penalty’); and there are all-too-frequent examples of women being paid less than men for the same role.
When translated into pensions this can be disastrous for that final investment amount.
Of course, less pay clearly means there’s less available to pay into a pension. But in addition, starting later or taking a career break is likely to mean missing out on the important compounding potential, earning interest on the reinvested interest.
According to research from Legal and General, the difference in size of the pension pot has a big influence on choices people make in retirement. Women are more likely to take their pensions in a cash lump sum rather than drawing down the funds more flexibly – which not only might result in the loss of potential future investment growth but also might have more immediate income tax implications too.
Finding some easy wins to get maximum value
Clearly saving into a pension as early as possible is always an advantage. And if you have opted out of a workplace pension scheme, it’s worth considering opting back in again.
But one of the biggest things you can do now, is considering the potential for increasing your pension contributions. That means more focus on areas where you can get maximum value.
We’ve looked below at two areas we think are relatively ‘easy’ wins, but they are by no means the only one. Why not get in touch to have a conversation about how we can help.
The first ‘easy win’ is the government’s marriage allowance.
This is worth considering if you’re on parental leave, retired, self employed or not in employment. It’s a way for somebody in a civil partnership or married to transfer some of their personal (income tax) allowance and thus trimming their tax bill.
It’s easy to do online or over the phone (or speak to us and we can help). It’s also possible to claim back up to four of the last tax years if the allowance has not been claimed.
To qualify, one of you needs to be a non-taxpayer (earning below the personal allowance threshold of £12,570), while the other should not be a higher rate taxpayer. In Scotland, this means paying the starter, basic or intermediate rate (an income between £12,571 and £43,662). You must be married or in a civil partnership and born after 6 April 1935.
The marriage allowance lets you transfer £1,260 of your personal allowance to your non-tax paying partner, meaning potential income tax savings of up to £252 in the current tax year.
Getting back your child benefit
Another area to consider is child benefit. This is paid to almost all UK parents tax free. It’s not means-tested, with no extra qualifying requirements like paying National Insurance contributions.
But higher earners have to pay an income tax charge. With income of over £50,000 a year, you’ll pay 1% of the benefit received for every £100 of excess income. And, if you earn more than £60,000 a year, the charge will cancel out the benefit entirely.
There is a way to recoup this benefit though. Paying into a personal pension or occupational pension scheme reduces your net income for the year, which could help bring down the potential charge and restore the entitlement to child benefit. It’s potentially a win-win of increasing payments to your retirement provision and reducing your potential tax liabilities.
We have much more information available for our clients on understanding pension entitlements and requirements, including our educational box sets, produced in association with Money Alive to bring you an interactive, jargon-free, way to explore the most important financial topics. Among the videos is a session helping simplify the complexities of the state pension system and getting a personal forecast.
This is the last of our articles concentrating on pensions. Next month with a new tax year approaching, we’re switching focus to look at areas related to the things you need to consider getting in place before the new financial year, such as making wills and inheritance tax requirements.