As a new report reveals how a gender gap in private pension income is likely to persist for decades, an expert advises women on the best investment strategies to bridge the gap
International Women’s Day is a global phenomenon, entrenched in many brand calendars for its positive celebration of women’s achievements in the march towards equality. And it’s also a useful annual tool to highlight the disparities that women still face in many aspects of everyday life.
The Institute for Fiscal Studies (IFS) has used the day to shine a light on the difference in private pension incomes between women and men in 2023. New IFS research released on 8 March found there are ‘substantial’ gender gaps in private pension incomes that it says show no signs of narrowing.
Women in their seventies, who have lower average lifetime earnings and longer retirements than men in their age group, have around 45 per cent less retirement income, the IFS found. This gap remains for younger workers today and for working women who have children, it says.
In other words, women are putting less money into pensions because women’s earnings are on average lower.
In order to reduce the gender pension income gap of the future, the gender pay gap would have to be reduced now.
— Heidi Karjalainen (@Heidi_Karj) March 8, 2023
The report, funded by the Nuffield Foundation, was compiled using data from the Office for National Statistics (ONS), the Department for Work and Pensions (DWP) and household surveys from Understanding Society and the Wealth and Assets Survey.
It comes as research by Scottish Widows suggests women today retire with an average £123,000 less than men.
Where do employers stand on the pension gap?
There is some evidence that big City firms are improving their attitudes towards women and maternity leave.
Experienced employment lawyer Rob Stanton, of Keystone Law, says that given the underrepresentation of women in senior roles, ‘most City employees these days do better – bigger banks and wealth managers give some, if not total credit, to women’s bonuses during their entire maternity leave.’
‘Given the underrepresentation of women in the City and in senior roles it’s seen as a way of attracting more women into senior roles,’ he adds.
But there’s still work to be done.
‘Some pay gaps between men and women are huge,’ Stanton says. ‘The days of women being paid less for doing the same work as a man are rarer than they used to be, but the fact there are a lot less senior women means men are, on average, earning more than women because they’re in those more senior positions.’
What’s behind the private pensions gender gap?
Laurence O’Brien, IFS research economist and the report’s lead author, believes root and branch reform is needed to tackle gender imbalances in the labour market that mean employers contribute less to women’s pension pots.
‘Labour market gaps are still prevalent even among the youngest generations, and they open up especially after having children.
‘As these generations will not retire for many decades, we can expect a gender gap in pension incomes to remain for a long time yet.
‘Policymakers concerned with this gap should see it as part and parcel of labour market issues, as opposed to a completely distinct issue with private pensions themselves.’
Alex Beer, welfare programme head at the Nuffield Foundation, echoed the call for policy change, adding: ‘The UK pensions system relies heavily on private pension saving for providing living standards in retirement.’
Last month, pensions minister Laura Trott announced plans for regular updates on the gender pension gap issue, with a view to the government ‘monitoring and reporting on the issue regularly.’
Responding to the IFS report, a DWP spokesperson said: ‘In 2021, 87 per cent of eligible women working in the private sector were participating in a workplace pension, up from 40 per cent in 2012.’
The DWP also highlighted government support for recent proposals to drop the age of automatic pension enrolment for employees from the age of 22 to 18.
What can women do about their private pension contributions?
How can women with the means to top up their pension contributions maximise their investments to better secure their financial future?
Women may need to take on more risk, Faye Silver, wealth manager at Raymond James, tells Spear’s.
‘Financial gain is not a natural priority for a lot of women, who focus on safety and security,’ Silver explains. ‘Our role as wealth managers is to give them confidence to take the appropriate amount of risk.
‘This is also dependent on clients’ timescale to retirement,’ she advises. ‘If it’s less than five years, you should tread with a bit more caution.’
Silver advises consolidating pensions from past employers into a SIPP (self-invested personal pension), which allows more control over where and how the money is invested.
‘A SIPP gives the investor a wider scope of investments. It can lead to a more diverse investment portfolio, which could have global diversification as well as asset class.
‘What you don’t want are investments that are closely correlated.’
When it comes to the myriad options for investment, including ISAs, Venture Capital Trusts and Enterprise Investment Schemes, Silver says pension investments should be considered first because of the tax relief benefit.
‘But using other types of tax wrappers is also a good idea,’ she says. ‘Raymond James generally steers away from VCTs and EISs as they are often too risky and complex for most people’s needs, but building up investments in ISAs is an easy way of adding to the retirement nest egg.’
Silver says the number of females seeking retirement investment advice has risen. Women should be taking action now to plan for the future after they stop work, she says.
‘Firstly, find a wealth manager you actually like. Planning for retirement is a long term project which requires some focus.’
When it comes to investing your own private pension, Silver suggests that ‘taking a more active approach with the investments will, in the long-term, produce improved comparative returns from the staple pension funds usually given.’
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