3 powerful ways the eye-opening 40% gender pension gap affects women

It’s been more than five decades since royal assent was given to the Equal Pay Act. However, even 50 years hasn’t eliminated the gender pay gap, with a 15% pay gap still existing in 2020:

  • Among full-time employees the gender pay gap in April 2020 was 7.4%
  • The gender pay gap among all employees was 15.5% in 2020.

The Independent also report that women’s earnings fell by 13%, on average, during the pandemic – twice as much as the average earnings of a man. Thinktank the Centre for London reports that half of UK women have reported a drop in disposable income as they were more likely to be employed in lower paid sectors such as leisure and retail.

Indeed, the Women and Equalities Committee is now calling for the government to review the effect of the Coronavirus Job Retention Scheme (the “furlough” scheme) and the Self-Employed Income Support Scheme, in addition to the business recovery plans that are, it warns, “heavily gendered… with investment plans skewed towards male-dominated sectors”.

Of course, inequality in pay also has a knock-on effect on pensions. While a 15% gender pay gap may be shocking, the gender pensions gap is far worse. Read on to find out why.

Inequality in the State Pension

In recent years, there have been several high-profile issues concerning women and the State Pension.

We’ve written before about the problems many women have faced, from unexpected changes in the State Pension Age to, most recently, a £3 billion “systematic underpayment of State Pensions” to:

  • Thousands of married women whose husbands reached pensionable age before 2008
  • Widows
  • Women over the age of 80.

While tens of thousands of women are expected to receive additional pension payments in the next few years, these issues have left many women receiving lower pensions than they were entitled to.

Inequality in private pensions

While a 15% gender pay gap remains, the Independent says that the combination of lower pay with the motherhood “penalty” of lower incomes after having children, means the gender pensions gap is closer to 40%.

If you think about it, it is simple maths. An employer is obliged to contribute 3% of someone’s income to a workplace pension scheme in addition to the 5% made by an employee. If a full-time male worker earns 7.4% more than a female colleague, then their pension contributions will be greater as they are based on a higher salary.

Insurer and pension provider Scottish Widows has estimated that the average woman in her 20s is on course to end her working life with £100,000 less in long-term savings than the average man of the same age.

This means to reach parity in later life, she would have to work 37 years longer than a man to accumulate the same retirement income.

Jackie Leiper from Scottish Widows says: “Women were already facing systemic challenges when saving for retirement. We know that young women have been some of the hardest hit by the short-term financial impact of the pandemic and this has only exacerbated the challenge of reaching pensions parity.

“At the same time, caring responsibilities and high childcare costs are keeping women out of the workforce, lowering their contributions and denting their pension pots.”

How women can take control of their retirement income

Experts generally acknowledge that the rollout of workplace pensions has helped increase some women to boost their long-term savings levels.

However, the eligibility criteria of these pensions means that those who would benefit the most from employer and government top-ups – lower-paid and part-time workers, most of them women – miss out again.

An average young woman might save approximately £2,200 a year into a pension, compared with £3,300 for men. Over a lifetime, this £1,100 annual difference only gets wider as wage increases lead to further inequalities in income.

If a typical woman were to increase her pension contributions at the start of her career and save an additional 4%, her pot at 68 could be £329,139, Scottish Widows calculates. This would reduce the gender pensions gap by almost £75,000.

Increasing contributions by 5% would increase the size of the pot by £94,000, which would close the gap almost completely.

“Whilst we can’t change societal norms overnight, progress is still possible to help young women achieve a comfortable retirement,” Leiper adds. “By taking control of their contributions and increasing them as early as possible, young women stand a fighting chance of improving their long-term savings outlook.”

Get in touch

If you’d like to take control of your retirement savings, please get in touch. Contact us by email at info@blueskyifas.co.uk or call us on 01189 876655.