Automatic enrolment, a Government initiative to help more people save for retirement through a pension scheme at work, will be celebrating its 5th birthday later this year. Research by the Department for Work & Pensions found in 2015 that three quarters of eligible* employees were participating in a workplace pension. 36% of all participating eligible employees were women which reflects not only the difference in earnings and working patterns from men, but also our lower appetite for participation.
When you dig into the numbers about women and retirement (Scottish Widows) only 52% of women are saving adequately for retirement (vs. 60% of men). Or look at it in a different way (glass half empty), 48% of women are not saving adequately for retirement. 18 - 29 year olds said they would feel comfortable on £24,000 per annum in retirement, but they thought that a pot of £241,000 would be sufficient to provide this income (i.e. they either believed they could earn 10% a year from their pension pot or they thought that they would only spend 10 years in retirement).
Cutting Contributions Instead of Increasing Them
When women were probed about cutting contributions to their pension to meet the cost of childcare, they were relaxed about this as they believed that their partner’s pension pot could help support them during retirement. Whilst this may be the case, this setup immediately puts women at risk of not having adequate retirement savings should their relationship collapse. Whilst gaps in employment should be decided together in a relationship, there needs to be a discussion around how the shortfall in income for the individual taking time off of work can be tackled, so that she does not need to rely on her partner.
Don’t Rely on the State Pension
Relying on a partner is just one reason that we are more optimistic about retirement than we should be. Another reason is that we believe that there will be a state pension when we. In 2014, a paper released by the Centre for Policy Studies suggested that people in their 20s and 30s should not rely on receiving any state pension in retirement.
We have a potential pension crisis brewing and women may be hit the hardest. But, all is not lost. We can do something about it and we can start today by taking a good look at our own situation.
How to Start Saving for Retirement
There’s much more to saving for retirement than ‘saving for retirement’. For many of us, that means not burying our heads in the sand (easier said than done), embracing the opportunity to save our gross (pre-tax) income and being truly independent with money.
1. Swot up. At work, ask the Employee Benefits team to go through your pension options. Attend a workshop at work on your benefits. Ask questions and don’t feel embarassed. When I attended a pension consultation at my last company, there were employees who were in their 30s, 40s and 50s, male and female. You should take pride in finding out as much as you can about pensions. You can also read more at The Money Advice Service.
2. Do the calculations. How much do you spend each year? Multiply that number by 25 (the number of years you may be retired if you retire aged 60). If you currently spend £20,000 a year, then you need at least £500,000 in your pension pot. That’s if you plan to exhaust your pot by the time you pass away. If you wish to draw 2.5% from your pot (which is considered to be a safe withdrawal rate in the UK to leave your funds intact), you would need £1 million.
3. Redefine pensions. It’s easy to say that pensions are boring, that they’re a burden and that we’d rather spend the money on something else. Shift your attitude and focus on the positives of a pension including but not limited to the following: you can save your gross income (your salary before tax), your employer will match your contribution up to a point, the earlier you start the less you need to contribute later thanks to compounding interest.
4. Be responsible for you. Nobody cares more about your money than you. Sure, your partner and you handle your finances together, but you have every opportunity to save for retirement separately. By doing so, you can cushion yourself against the worse (i.e. divorce) and you can enjoy the benefits of two large pension pots if you and your partner are still together in your 50s.
5. Get out of debt. The Scottish Widows research found that married women, who typically start saving for retirement earlier, have some of the highest levels of personal debt among women. The interest you pay on debt compounds (you pay more the longer you hold your debt). When you save for retirement your returns compound (you earn more the longer you hold your savings). If you have both debt and pension contributions, it’s important to figure out how much interest you’re paying on your debt, because if it’s high (e.g. 19%) it’s worthwhile maximising what you pay off each month to clear the debt faster. After those calculations, see if there’s some money you can put towards your retirement e.g. contribute the minimum to get your employer to match your contributions.
6. Combine your pensions. Seek financial advice and combine your pensions. You could cut the amount of fees you pay by keeping everything in one place. If you decide not to combine your pensions, use a simple spreadsheet or a notepad to track your pension pots. Half of fulltime working women said the ability to see all their pension pots in one place would encourage them to save more for retirement.
7. Consider your options. Retiring in the UK is expensive. If you fancy an adventure, you can retire earlier than most by moving abroad. We recently developed a free tool to show you where you can retire early around the world.
*An eligible employee is aged between 22 and state pension age, working in the UK and earning above £10,000. These are the employees that get enrolled into the workplace pension scheme automatically and must opt out, if they do not wish to pay into a pension.