Recent research based on DWP data revealed a reversal in the enduring gender pension gap for the first time ever, with women under 75 receiving an annual income £52 higher than their male counterparts, writes Richard Gillham, Financial Planner at Progeny
This may not sound too much but it’s in stark contrast to single female pensioners over the age of 75, who receive £2,236 less than the men of that age. It underlines how important it is for women to develop solid pension saving habits throughout their working lives, especially as women are still statistically more likely to take time out of the workplace if they choose to start a family.
Here are five basic golden rules that all workplace and personal pension savers should take note of to help them retire with confidence.
Start saving early
Delaying saving into a pension at an early age is a costly mistake which automatic workplace pension enrolment (AE) was introduced to help tackle. For the self-employed however, personal pension saving is still a matter of choice.
In short, the longer people delay, the more it costs them to build a good-sized pension. Roughly speaking, every ten-year delay could reduce a pension pot’s potential growth by half, according to data from Unbiased.
This is because at the core of long-term investing is the power of compound growth. This is essentially like a snowball effect, whereby you receive growth, not only on your original investments, but also on any interest, dividends, and capital gains that have accumulated, allowing money to grow faster and faster as time goes on.
Use pensions to save tax
Pensions are widely recognised as the most tax efficient way for most people to save. This is because whenever a saver pays into a pension, as opposed to other savings vehicles, they are getting a top up from the government in the form of tax relief.
Think of tax relief on pension contributions as one of the rare occasions when the taxman gives something back. This is because retirement savers are refunded the income tax that they initially paid on this money, equating to between 20 – 45% of the total contribution, depending what rate of tax people pay.
Pension pots are also usually exempt from inheritance tax, making them a tax-efficient way to pass on money to loved ones.
Save enough
Over ten years on from auto-enrolment, the majority of people are still not saving enough for retirement, according to the Work and Pensions Committee, with analysis showing that only 37% of individuals are on track for an ‘adequate pension’ (67% of pre-retirement income for the average earner).
If people are paying the minimum contribution into a workplace scheme then it’s important to note that this is only targeted to achieve an income replacement rate of around 45%. Even in addition to a State Pension, this will not be enough for a comfortable retirement in most people’s eyes.
In terms of increasing their pension contributions, people can either top up their regular payments or consider paying in any lump sums they may receive, such as a bonus, just being careful to ensure that the amount being paid in won’t take them over their pension annual allowance or they might face a tax charge. People would need to speak to their employer about topping up regular workplace payments, or setting up an individual pension arrangement to supplement a workplace pension may offer greater flexibility. Just remember that you can’t currently access your pension until you’re 55 at the earliest, (changing to 57 in 2028) so think carefully before paying in any savings that you may need before then.
Money Helper offer a useful pension calculator, which can provide a forecast for likely pension income at retirement.
Consider the impact of divorce
Pensions can be one of the most valuable assets in a divorce, in some cases being worth more than the family home. However, according to research from Legal and General, whilst 50% of people said they’d split their home in a divorce, just 12% said they’d consider their pensions.
However, existing pensions should be a key consideration in any financial settlement for a divorce or a dissolution of civil partnership, especially as it’s not uncommon for one spouse to have significantly more in their pension savings than the other.
Different pension schemes require different approaches and the importance of understanding how the relevant pension schemes work and what options are available for each party cannot be underestimated in terms of helping to avoid future financial vulnerability in retirement.
Don’t rely on single non-pension sources for retirement
A home tends to be the average person’s largest investment but deciding to solely rely on property as a retirement fund, (be that a home or a property portfolio) presents a significant risk as it lacks any diversification, which helps reduce the chance of experiencing losses.
Many people also rely on a future inheritance to fund their retirement, but this is an equally unreliable strategy. Based on increasing life expectancy figures, older generations are likely to live well into their retirement years and/or could incur significant long term care costs, which may result in a much smaller inheritance sum than expected.
Every day good practice relating to pensions can often get overlooked. By being aware of some basic golden rules however, the average female pension saver can help make the gender pension gap a thing of the past and enable themselves to retire with confidence, as well as helping to build a potential legacy that can generally be passed on to loved ones free of inheritance tax.
