Warning for women as pensions crisis deepens

Published on Saturday 17 October 2009 13:49

THE crisis of women's pensions has deepened over the past year, with women cutting back on their already meagre retirement savings as recession eats away at family budgets, according to Scottish Widows' fifth report into the state of women's pensions.

And at a time when pension saving has increased, more women are saving nothing towards their retirement. More than a quarter of those who could save (26 per cent) are not saving at all. This figure has leapt from 22 per cent in 2008 and compares with 15 per cent for men.

Career breaks to raise a family mean women have traditionally had to get by in retirement on significantly poorer pensions than male partners. But when times are tough and family budgets have to be cut, women's pension contributions are usually sacrificed first.

The Scottish Widows report, Women's Pensions Today And Tomorrow, also reveals that only 47 per cent of those who save are saving enough, compared with 59 per cent of men.

Ian Naismith, head of pensions development at Scottish Widows, says: "During the economic downturn overall pensions savings have increased, but this is mainly among men and the gender gap has actually widened compared to last year.

"Year on year our findings have exposed women as the pensions underdogs, and in a climate when people need to be saving more than ever for their futures, it is worrying that women over 50 are actually saving less than previous years."

Family life and having children are the main barriers. Almost a quarter of women with dependent children have stopped or reduced pension contributions after having children. This is twice the rate at which a man allows children to interfere with his retirement planning.

When they return to work, women often opt for self-employed status, or end up with temporary or casual posts, or working for small businesses. These do not normally come with a pension.

Another hurdle is the fact that providing a pension, without the assistance of an employer, is more expensive for women than it is for men, because they live longer.

But it is not all doom and gloom. Many returnees will join the public sector, where pension provision is generous. However, they will still be concentrated among lower-paid workers, so their pensions on retirement may still be modest.

Whatever their pension position or stage of life or career, women ignore their pensions at their peril. Scotland on Sunday has drawn up a ten-point plan to help women make the most of the money available:

1. Take care of your state pension

The state pension is more important for many women than for men, because it is likely to comprise a larger slice of their retirement income compared with private provision, and will at least guarantee that some money comes in during retirement, which they have not necessarily funded themselves.

It's certainly not a fortune, at 95.25 weekly, and is due to rise by only 2.40 next April to 97.65. But because women live longer, replacing this money by buying private provision is more expensive for women than for men, so their state pension is more valuable to them than their male contemporaries.

The bad news is that the Conservatives are planning to increase to 66 the age at which those aged between 51 and 54 qualify for a state pension. From next year, older women are having to work on beyond 60, as their retirement gradually increases to 65, to make it the same as for men. Younger women will have to work longer still.

The size of your state pension depends on your National Insurance contributions. Currently, women need to have contributed for 39 years to get a full pension. There is some protection for years off work raising children, although it isn't comprehensive. All of which has brought us to the position where fewer than half of all women qualify for a full state pension in their own right, compared with nine out of ten men, because of gaps in their National Insurance records.

The good news is from next year getting that full pension is going to be much easier. Those retiring from 2010 onwards only require 30 years of contributions.

2. Fill the gaps

All women should carry out a pensions forecast, to check out the state of their National Insurance record, which can be done online via www.thepensionservice.gov.uk. Or you can call the State Pension Forecasting Team on 0845 3000 168 (textphone 0845 3000 169).

This will show you if you are on track for a full pension, or if your state pension is on target to fall short. If you are not on track for a full pension because of gaps, it might be worth filling in the missing years. You can go back and plug the holes in up to six tax years. And if you are due to retire between 2008 and 2015 you can buy any six years all the way back to 1975. It costs 12.05 to buy back a week, making an outlay of 627 for an entire year.

3. Join your company pension scheme

Always sign up for your employer's scheme, provided the company is contributing. If you don't you are missing out on a deferred salary contribution. And contribute yourself from as young as you can afford to. Starting early makes an enormous difference. But only save what you can afford. There is no sense in making huge pension contributions, if you are up to your eyes in debt.

It not only makes sense to invest in your future, but can also save you tax. Contributions are tax-free, so they reduce your income tax bill.

4. Take care when going on maternity leave

While you are on paid maternity leave, your pension should be treated as if you were still at work. Your employer must keep up contributions. However, once on unpaid leave, the contributions may stop.

This means your pension saving has ground to a halt unless you do something about it yourself. If you decide to take a career break then it is important to understand what protections are available.

Saving for the state pensions of women who were at home with children, or caring for a relative, should not stop completely. Home Responsibilities Protection is supposed to make good NI records. Sadly the system is flawed and hasn't offered many women the protection they hoped for, leaving them with a fragment of the pension they expected.

From 2010, Home Responsibilities Protection is being replaced with a weekly system of credits paid to those in receipt of child benefit for a child under 12, which should be better. This gives you the same NI credits towards your basic state pension as if you were working. If your child is under six, you also get some contribution towards your S2P top-up pension, which is a small additional state pension. But non-working women on career breaks can also invest up to 3,600 a year into a pension plan and enjoy the tax breaks, even though they are not earning a salary.

5. Save for yourself in a personal pension

If your employer doesn't operate a company scheme, or you are self-employed, then you will have to build up your own pension via a personal pension contract. It may make sense to consult a financial adviser to help you choose a good contract and sort out how much you wish to pay in.

Alternatively, there are many calculators on the internet which can help you decide on your level of contributions, and you can buy a pension from a well-known firm either online or via your bank. And don't forget you can invest 3,600 annually, which is grossed up to include tax relief, even if you are not working.

6. Why couples should plan together

Although investments into a pension are tax-free, the income which comes out at the other end is taxable. Therefore it is vital couples plan together.

Where spouses have money to boost their combined savings, it may often make sense to pay some if not all of it to the partner with the lowest pension provision. Then their personal tax allowance can be used to reduce tax during retirement.

Tax allowances in retirement are currently 9,490 for the over-65s and 9,640 for the over-75s. However, this additional tax allowance starts to be clawed back when income reaches 22,900. It makes sense therefore to ensure that, for example, a wife's pension is developed so she can utilise her tax allowance fully, rather than leaving her with no pension and her husband paying high rates.

However, this may not be the case where one partner's pension offers superior benefits. These decisions must be carefully weighed up.

7. Constantly review all your savings

Keep your pension under regular review to make sure it is achieving your targets. If you have investments which are not performing, abandon them. And you may need to pay more in from time to time.

But remember a pension doesn't have to mean a formal pension plan. You can also save in an Isa. The tax savings going in are not so good, as Isa savings come after the deduction of income tax. But when you take the income it is tax-free. Isas are a good alternative if you are unsure about locking funds away for too long, as you can get the money back.

If you have property or other investments, these too can be put into the equation.

8. Pensions and divorce

During the emotional turmoil that comes when relationships break down, make sure your pension isn't ignored. It is easy to split pensions between separating couples, so either take a share of the pension due to you or make sure these are fairly valued in the division of joint assets.

9. Become an annuity hawk

Annuities are a treacherous area for women. Firstly, while much of a family's retirement savings will have gone into the breadwinner's (usually a man's) pension pot, when he comes to retire, the overwhelming majority buy only a single life annuity. This means when they die, their wife is left with nothing. It is vital wives do everything they can to encourage their men to provide for them when they are buying their annuity, by opting into a joint-life contract.

When they are buying for themselves at retirement, women are discriminated against all over again, because they receive poorer annuity terms than men. In other words they need more money to buy the same income in retirement.

For example, a pension pot of 100,000 would buy a 65-year-old man a pension somewhere in the region of between 580 and 540 per month. However, a woman can expect about 40 less, reducing her pension by about 10 weekly. Shop around for the best deal you can get, and always declare any health problems as these will get you more.

10. Don't be shortchanged

Once retired, make sure you are getting every bit of assistance due. You may be entitled to an income booster via pension credit or help with your council tax.

According to Help the Aged, nearly two million pensioners are missing out on the pension credit support due to them, and 2.4 million are missing out on council tax benefit.

All pensioners are guaranteed a minimum income of 130 weekly under the pension credit rules, with couples entitled to 198.45.