Catherine Stewart, Scottish Widows
04 Apr 2017
Now in its twelfth year, the Scottish Widows Women and Retirement Report has shown a widening gender gap when it comes to saving adequately for retirement. A key reason is that women’s retirement planning tends to be more impacted by having children than men’s. Better awareness and education will help address the savings gap, and employers are well placed to provide this ahead of maternity leave.
Pensions are not likely to be front of mind for soon-to-be parents, but we’re recommending that employers provide information to workers ahead of maternity, parental or paternity leave, outlining the risks associated with lower contributions during this period. So, to give employers a helping hand, here’s the key information they should be sharing.
Where do the shortfalls arise?
- Maternity leave
While maternity leave lasts 52 weeks, statutory maternity pay is only available for a maximum of 39 weeks. During the paid leave, the employer will be contributing to the pension, based on the employee’s normal salary. But employee contributions are based on the actual pay they receive, which often means a shortfall.
During the unpaid period the employee doesn’t have to contribute anything and the employer may not either, depending on the rules of the scheme and contract of employment.
- Staying off work to look after the baby
If employees choose not to return to work after the 52 weeks, contributions to the workplace pension usually cease.
- Coming back to work part time
Both employee and employer contributions are normally based on a percentage of the employee’s salary. So any reduction in working hours will reduce the amount saved and impact the outcome at retirement.
- Childcare costs
Research from the Fawcett Society, who we partnered with for more insights into the pension savings gap, shows that childcare costs can often disproportionately fall on mothers more than fathers, impacting the overall amount they have available to save for their future.
What options do employees have available?
- Continue to pay in
People don’t have to be in work to keep paying into a pension and still benefit from a Government top-up. Even if they’re not earning enough to pay Income Tax, they can still receive tax relief on the first £2,880 they pay in, boosting contributions up to a maximum £3,600 a year.
During maternity leave, or after returning to work, employees can top-up their pension with single payments, or by increasing the percentage they pay in, to mitigate the impact of a reduced salary.
This won’t be right for everyone of course, so it needs to be considered carefully.
- Discuss shared finances with their partner
Couples might want to take a shared view of their finances, discussing how to share the impact of reduced pension contributions and how to rebalance costs, such as childcare, so they don’t all fall on one person, limiting their capacity to save.
They should also be aware that if only one partner is working, they can still pay into the other’s pension. These contributions will still receive the Government top-up as they’re treated as being paid net of income tax, which is reclaimed and added to the recipient’s pension pot.
- Understand how child benefit can impact their State Pension
35 years of National Insurance (NI) credits will be required to get the full State Pension. Even if they’re not working, people with a child under the age of 12 will get NI credits if they claim Child Benefit. This can make it worth claiming even if tax charges nullify any actual income from the benefit itself.
But stick to sharing the information, don’t try to give advice
It makes a huge difference when employers look to improve retirement planning in their workforce by making the information available. But it’s essential that they only talk about employees’ options – what they could do, not what they should do. It’s always important to highlight that independent financial advice may be worth considering, as well as the wealth of information available online from pension providers, advisers and independent organisations such as the Pensions Advisory Service.