You may have heard a lot about the gender pay gap, but did you know that there is also a pensions pay gap?
Research shows that the gender pensions gap is a whopping 40%. According to a recent report from Scottish Widows, the average woman in her twenties is on course to have staggering £100k less in her pension pot than a man of the same age. To make up for the shortfall, they would also have to work an extra 37 years.
Taking career breaks, working part time and lower pay are just some of the reasons for this gap, but starting to save for pension as soon as possible (yes, in your twenties) could help close that gap.
Starting young also means it will cost you less to reach your goal of decent income for when you stop working. The longer your money is invested in a pension, the more it will grow.
"Someone earning £25,000 and aiming to retire at 65 could bag a retirement pot of £169,000 if they start in their twenties, says Jess Miller, pensions and investment expert at Schroders Personal Wealth. "But if they start in their thirties, this drops to £93,000."
More than one in five (21%) women under 25 admit that they have not started thinking about retirement. If you’ve been putting off saving for a pension, then here is everything you need to know to help you get started.
A workplace pension
If you are working, then you will be part of a workplace pension scheme through what is known as auto-enrolment - this means your employer will automatically start deducting pension savings out of your month pay.
Auto-enrolment rules apply to employees over age 22 who earn at least £10,000. You can of course opt out, but it is a good idea to stay in the pension fund, because when you pay into it, so does your employer - so that is essentially free money from your employer.
The minimum you have to pay in 5% of your monthly salary and your employer must pay in a minimum of 3%.
Pay-in more into your pension
If you’re already paying into a workplace pension then that is great, but did you know that when you pay in more, so will your employer? Although your employer is not obliged to, many employers will match your contributions up to a certain amount.
"For someone on average earnings, just 1% extra added to your work pension contributions can mean an extra £23,000 on your eventual retirement pot. The extra monthly cost of this 1% when you are in your twenties starts off at £20," says Becky O’Connor, head of pensions and savings at Interactive Investor.
If you are thinking about paying more into your workplace pensions, talk to your HR department and ask them about contribution matching.
Pensions for self-employed workers
Around 60% of self-employed people have no pensions provision according to Fidelity International, leaving them at risk of little or no income when they stop working. Even if you have plan to work ‘forever’, putting some money aside for retirement is important because you may be forced to stop working if you got ill or if your business fails.
Sadly, if you are self-employed, you don’t have the perk of ‘free’ money from your employer contributions, but you will still benefit from a tax relief on your contributions. If you’re self-employed, take a look at options such as Nest pensions, Penfold, Raindrop and PensionBee, Nutmeg or Wealthify to get started.
Check the small print to see if you need to pay in minimum each month as this will differ between providers. "Whilst we can’t change societal norms overnight, progress is still possible to help young women achieve a comfortable retirement. 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," Jackie Leiper, managing director of pensions, stockbroking and distribution at Scottish Widows, adds.
How much state pension will I get ?
As you work, you will build up National Insurance (NI) credits, which then go towards your state pension. You need 35 years of NI credits to get a full state pension. A full state pension is £176.60 a week (from April 2021) - just over £706 month - so you ideally shouldn't rely on a state pension as your only source of income for when you eventually stop working. It's important to save into a workplace or personal pension as well.
You can find out what your state pension age is and what you may get at gov.uk.
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