I wrote a post for the PensionBee blog about the gender pension gap, and it made me really cross.
My husband bore the brunt of me stomping around, ranting about how women end up with drastically lower pension savings.
Previous post: What is a pension and why you should care?
Fundamentally, if women get paid less than men for the same work, we have fewer pounds to put into a pension.
Couple the gender pay gap with career breaks to raise children or care for elderly relatives, the drop in earnings if returning to work part time, and the damage that career breaks and part-time roles do to our promotion prospects, and women’s retirement savings take a massive hit. Fewer pounds in, fewer pounds out.
Meanwhile many men glide through their full-time roles, with only a fortnight here or there for paternity leave. They siphon off part of their salary into a pension every month, topped up with employer contributions and tax relief. Repeat till retirement and quit with a chunky pension pot. (Cue more swearing by me and fist shaking at the sky).
Fighting the gender pension gap after retirement
So for International Women’s Day, I think it’s time to start redressing the balance. Over in my PensionBee post, I set out a seven point action plan to fight back against the gender pension gap, so you reach retirement with more money.
Right here, I wanted to include tips on how women can earn more even after retirement. With longer life expectancy than men, we need to stretch our pension money further.
The snappily named Continuous Mortality Investigation (CMI) reckons that on average, men age 65 will live to 87 and women to 89. That means on average a woman retiring at 65 needs the funds to cover almost a quarter of a century – and many of us will live even longer.
Here’s three things to think about:
1. Don’t get crippled by cash
Don’t be tempted to whip money out of your private pension as soon as you can, and just stick it in a savings account. Changing pension rules have left many people fearful that the government might move the goal posts yet again. A savings account may feel like the safe option. But for women who need their money to last for 25 years plus, cash really isn’t the best option. With interest rates on savings accounts at record lows, the value of your money will be eaten away by inflation, so it won’t cover higher costs in future.
Sure, keep some emergency cash. But over the long term, staying invested should help women stretch their money for longer. Using racier investments will give your money more chance of keeping up with rising costs.
Previous post: Are you losing money on your savings?
2. Don’t get hit by a huge tax bill
Tax is another reason to think carefully before cashing in your pension savings as soon as you’re old enough.
With a pension, you can take out a quarter of your money without paying a penny in tax – but you could face an income tax bill on the rest. If you take out a big chunk of your retirement savings above the 25% tax free, it gets added to any other income you might get (think state pension, work pension or any job).
You might normally only pay basic rate tax. However, if your pension withdrawal pushes your income above the higher rate tax band, currently £46,350 a year, suddenly you’ll start paying 40% tax on anything above it.
If you’ve already been hit by the gender pay gap and gender pension gap, don’t get hit by the tax man too. Remember that if you split big withdrawals into smaller sums over several years, you could pay a lot less tax, and hang on to a lot more of your limited money.
Previous video: How does pension drawdown tax work?
3. Don’t take the first offer if you go for an annuity
Nowadays, we all have a lot more choice about what to do with our pension cash. One option is to manage your own money, choosing where to put it and how much to take out. Pension drawdown can work well, but it does come with the very real risk that the money disappears before you do.
Women tend to be less keen on investing than men. Only 6% of women hold investments in the stock market apart from pensions, compared to 13% of men, according to Fidelity International’s Power of Women report.
Previous post: Why women don’t invest
If you don’t want the faff of managing investments and worrying if your money will run out, it’s still worth considering an annuity.
An annuity is when you hand over a chunk of money to a pension company, and they pay you an income in return.
Annuities get a bad rap because the rates are low, but they do bring peace of mind by guaranteeing to continue paying an income for as long as you live. Annuities are what most people bought with their private pension savings, before George Osborne ripped up the pensions rule book.
The crucial thing with annuities is that it’s a one shot deal.
You sign on the dotted line, and that’s it. No potential to move your money elsewhere. You can’t try one company for size, get fed up and switch annuity companies.
I bang on about comparing prices on your bills. But if there’s one product where you MUST compare your options – it’s an annuity. Because your choice affects your income for the rest of your life, and you can’t change your mind.
Worryingly, only one in four individuals shopping around for annuities with their retirement savings are women, according to research by financial advisers LEBC. Fewer women compared deals across the whole of the market – and the proportion has fallen, from 37% in 2016 to just 25% in 2017 and 2018.
Remember, you don’t have to accept whatever your pension company offers. Look around! It’s called ‘exercising your open market option’. Get quotes from other companies, and if they offer more income, grab it. Don’t stay with your original pension company from a misguided sense of loyalty. Don’t assume the company you’ve known so long has your best interests at heart. If you don’t compare quotes, you could be missing out on hundreds if not thousands of pounds a year.
It’s even more important if you have health issues. Smokers or people with certain medical conditions get paid higher income, from delightfully named ‘impaired life’ annuities. (Basically, if an annuity company thinks you’re likely to pop your clogs earlier, they’ll give you more money each year because they reckon they’ll be paying it for less time). LEBC reckons two thirds of their clients are eligible for higher pay outs.
I’m not convinced an annuity will make the most of my own retirement savings. But if you do want to use pension money to buy an annuity, make sure you shop around!
Now – over to you. Have you thought about how you’ll use your pension savings after retirement? If you’ve already retired, any tips on how to make the most of your money? Do share in the comments, I’d love to hear!
Pensions are one area where it’s important to get good advice. Over 50s can book an appointment with PensionWise, a government body, for impartial guidance about your options. You can also find local independent financial advisers via VouchedFor and Unbiased.co.uk
For more posts by UK Money Bloggers celebrating International Women’s Day, check out the UKMB website.
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