Strategic Finance
Addressing the pension gender imbalance |
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| Strategic Finance | |
| Written by Ian Bird, Principal Partner, Foster Denovo | |
| Friday, 04 June 2010 | |
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Practical steps that employers could take to try and help their female employees improve their pension.
Recent research has revealed that many women are retiring on less than their male counterparts and that there is a growing problem of pension inequality between the two sexes. According to research carried out by Foster Denovo, in conjunction with YouGov, 76% of men have a pension in place compared to just 57% of women. In addition, a recent report by the Prudential revealed that the average male pension is more than £7,000 a year higher than that of their female counterparts. When we consider that we have larger numbers of people than ever before living longer into their retirement, these statistics present a bleak outlook for the future of female pension provision. In my experience one of the principal reasons that many women are having to retire on a lower income than men is due to time taken out of their careers to raise their families, coupled with the fact that women typically earn less than men, and may have relied upon their husbands and partners for financial support in retirement. The new tax year heralded significant changes to the qualifying conditions for receiving state pension. From 6 April 2010, the number of qualifying years of national insurance (NI) payments needed for the full basic state pension reduced from its present level of 39 years to 30. It is hoped that this move will redress the balance in numbers of women who qualify to receive a full basic state pension in their own right. Further changes which will be of particular benefit to women include the scrapping of the minimum 25% rule and the replacement of the old, and little understood, Home Responsibilities Protection arrangements with a new and improved system of NI credits for carers. These measures are designed to give women a better deal when it comes to their state pension. While this is good news on the one hand, seeing more women entitled to a full basic state pension, the fact is that they will now have to wait longer to receive it. In a bid to address the financial burden of supporting an ageing population, the retirement ages for men and women are changing. In the past, women retired at 60 and men at 65 but changes are underway to equalise this and then raise it to 68 for both. The last women to retire at age 60 were those who turned 60 on April 5 this year. Those born after this date will have to wait longer. The state pension age will gradually rise until April 2020, at which point all women will have a retirement age of 65. It is then intended that the retirement age for men and women will be increased in stages from 2024, until in 2046 the retirement age will be 68. 2012 Pension ReformIn a further attempt to address the growing pensions’ crisis, the government will be introducing pension reform from 2012. This legislation will see all employers having to auto-enrol eligible employees into a workplace pension and contribute a minimum of 3% of specified band earnings (£5,035 and £33,540) into their pension. Employees will have to pay 5% of band earnings, of which 1% will come in the form of tax relief. Employees will have the ability to opt out, employers will not. The move is aimed at getting the estimated seven million people currently not saving or under-saving for their retirement into a pension. This is likely to include large numbers of women who may currently have little in the way of pension provision. Many believe that the success of the reform will lie with employers and the way that they communicate with their employees on the subject of pensions – without sound financial education and awareness, employees maybe unable to make informed choices about their financial future. I believe that the inequality between men and women in retirement is likely to continue to worsen as our retired population increases. So, what can employers do to support their female workforce with better retirement planning? Communicate your benefits and help employees to start saving as soon as possible In order to stand a chance of addressing the issue of pension inequality, it is advisable for women to start saving for their retirement as soon as possible. The younger employees start saving, the easier it is to save. If you offer an employer pension contribution to your staff, make sure that you communicate it so that employees have the opportunity to take full advantage of the benefits on offer to them. Encourage employees to check their retirement ageEncourage your workforce to find out when they will be entitled to receive their state pension. Changes to retirement ages mean that some employees may have to work longer than they might expect. Employees can check their state retirement age at www.betterfuture.direct.gov.uk Find out likely retirement incomeI would encourage all employees to ensure that they have an understanding of what their likely retirement income is going to be. In many cases, employees may benefit from speaking to a financial adviser to work out what their pension will be based on any previous pensions and their likely state pension entitlement. By measuring this against their individual retirement objectives, employees will have the opportunity to assess whether they are on target for their goal retirement income. Check any National Insurance gapsOne of the main reasons that women may get less in retirement is due to time taken out of their careers to raise their families. An employee’s entitlement to the full state pension is based on the number of National Insurance (NI) contribution credits made. This has now reduced to only 30 qualifying years to get a full state pension. This allows employees to have a number of years out of the workplace without it having an impact on their pension record. Employees who do not qualify for a full state pension can consider making additional payments to ‘buy back’ years where no NI contributions were made. There is a time limit on buying them back – you can only buy a year back up to six years after it has taken place, so the 2008-09 year, for instance, would need to be bought back by April 5 2015. Employees can find out more at www.hmrc.gov.uk Ian Bird, Principal Partner, Foster Denovo www.fosterdenovo.com
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