The Gender Pension Gap: A Heated Discussion
Last week, I found myself in a passionate debate with a financial expert regarding the gender pension gap. My frustration stemmed from his apparent lack of seriousness about the issue, while he was irritated by what he perceived as my over-analysis. After several rounds of discussion, it became clear that we were not actually arguing against each other; rather, we were both passionate about separate yet interconnected issues.
I firmly believe that everyone should have sufficient pension savings to confidently navigate their retirement years, and the gender pension gap highlights that many women are far from achieving this goal. On the other hand, he was focused on the idea that not all pensions need to be equal, feeling that a pensions gap is not inherently negative. Thankfully, we managed to find common ground—both perspectives can coexist.
Understanding the Origins of the Gender Pension Gap
The gender pension gap primarily originates from the dynamics of the workplace. When couples have children, it is common for one partner to reduce their working hours or take a career break. Statistically, this individual is often the woman, resulting in a significant decrease in her earning potential.
From the financial expert’s viewpoint, couples should look for strategies to optimize their joint pension wealth, calculating who stands to gain more from prioritizing pension contributions. However, I contend that while it is natural for one partner to earn more at various life stages, the persistent gender pension gap serves as evidence that men, in most cases, retire with larger pensions. For many couples, this arrangement works, but it can leave women without adequate pension income to maintain control over pivotal life choices. Alarmingly, women represent over two-thirds of pensioners living in poverty, indicating a need for vigilance in this approach.
The Risks of Insufficient Pension Income
Moreover, there is the risk that couples may not remain together until retirement. This poses a significant threat to unmarried partners with smaller pension savings, as they would have no claim to their partner’s pension savings. This reliance on trust can be precarious, especially considering that nearly 41% of marriages end in divorce by the 25th anniversary. While pension assets can be divided during divorce, the reality often differs from expectations.
Worryingly, many couples overlook pensions during divorce proceedings. When pensions are taken into account, they may opt for offsetting—where one partner retains the pension while the other receives equity in the family home. Though this approach may seem fair and beneficial for maintaining stability for children, it often means starting from scratch with pensions later in life.
It is crucial for individuals with unequal pensions to be mindful of the difficult choices they face during divorce and the long-term consequences of those decisions. If one decides to prioritize retaining the property over pension rights, how will they manage financial obligations while simultaneously trying to build a pension? Even for couples who successfully retire together, if one partner has inadequate pension savings, they must depend on their partner’s income. Conversely, the partner with a more substantial pension may find themselves needing to share a considerable portion of their savings. Disagreements about finances are common in relationships, raising questions about how to navigate differing income levels in retirement.
Strategies to Address the Gender Pension Gap
To address the gender pension gap, couples must adopt proactive strategies. If one partner is a higher-rate taxpayer while the other is a basic-rate taxpayer, it may be more beneficial for the higher earner to contribute to their pension, allowing for greater tax relief. Additionally, if one partner’s employer offers a pension matching scheme and the other’s does not, this should be factored into their financial planning. This does not mean halting contributions to the other pension entirely; rather, it may warrant prioritizing contributions to the more advantageous plan.
Another important step is to check one’s National Insurance (NI) record to ensure eligibility for the full state pension. Achieving the requisite 35 years of NI contributions can be bolstered by contacting the Department for Work and Pensions (DWP) to fill any gaps. For many, addressing these gaps could result in a more substantial state pension during retirement.
Sarah Coles is the head of personal finance at Hargreaves Lansdown.
Five Steps to Enhance Your Pension
- Maintain contributions during maternity leave. You can continue contributing at a percentage based on your maternity pay, and your employer must keep contributing based on your full salary. If your contributions are through a salary sacrifice scheme, your employer has to cover the entire cost.
- Consider your pension a financial priority. If you take a career break, create a budget that includes essential expenses, such as your mortgage and bills, ensuring that your pension contributions are included as a non-negotiable item.
- Manage retirement income collaboratively. Discuss financial decisions as a couple, considering how each choice affects the other, and work towards a shared financial goal.
- Evaluate pension investments. By understanding and tailoring your pension investments to your specific needs, you can potentially make up for shortfalls through investment growth.
- Face the realities of your pension situation. If you have paused pension contributions, do not shy away from the truth. Utilize a pension calculator to assess your potential retirement income and identify what steps are needed to catch up. The sooner you take action, the easier it will be to improve your situation.
