With gender pay gaps very much in the news, and women often taking career breaks to care for children or elderly parents, it’s vital for women to take control of their financial planning.
As equality between the sexes inches ever closer, you could be forgiven for thinking that women’s financial planning priorities are pretty much the same as men’s. But in my experience as a wealth adviser and financial planner hard-wired differences between the sexes – such as attitudes to family, generally lower pay and longer life expectancy – mean women need to adopt a different mindset when planning their finances.
Arguably, the biggest factor holding back women’s finances is pay. The simple fact is that women earn less than men. Women are more likely to have part-time or lower-status jobs, and they often earn less money for doing the same work as men – as demonstrated by the BBC’s recent equal pay scandal.
Office for National Statistics figures show that in 2017, men, on average, were paid £1.32 more an hour than women, which, as a proportion of men’s pay, is a pay gap of 9.1%.
The more you earn, the more you can save – and the bigger your employer pension contributions will be. Unfortunately, because women are often not as assertive as men in asking for pay rises, women fail to get the pay they deserve. Make sure you are getting what your male peers earn and if you aren’t, don’t be shy about asking why not.
Challenge of planning solo
Single women, particularly single parents, face a bigger challenge in providing for their retirement. Couples can share bills – single people cannot. Single women with children will naturally channel their resources towards their offspring’s wellbeing before thinking about their own finances – making it harder to set money aside for the long term.
But when children grow up, single parents need to overcome the desire to continue to provide for them, whether by paying their university fees or a deposit to buy a house. Focus on your own retirement plans – adult children have decades ahead of them to earn money. You do not.
Don't rely on your partner
Women in relationships should make sure they can provide for themselves – even if they feel confident that their partner can support them.
Make sure you have your own pension provision, rainy day money and financial protection because you never know what might happen to your relationship.
Some people see marriage as an unfashionable institution, but it does bring financial advantages. If you are co-habiting, have a serious conversation with your partner about a discreet trip to the registry office. Tying the knot gives security in relation to pension, property and other assets built up in the relationship, plus the inheritance tax advantages of marriage are huge.
Married couples can pass money between each other without any tax implications. If one partner is earning nothing, but there are jointly held assets such as stocks, shares or rental property, these can be held in the hands of the non-working party for tax purposes. This means no income tax at all will be paid on the first £11,500 (£11,850 in the April 2018-19 tax year).
Dealing with career breaks
When it comes to pension planning, most men build up better retirement provision through a combination of state and workplace pensions. Many women must overcome the financial impact of career breaks spent caring for children.
Research by the independent Pensions Policy Institute in July 2017 found that 34% of women are likely to have a career break involving caring responsibilities. This leads to a ‘motherhood penalty’ that results in lower pension accrual.
Women in relationships should not just assume they will be the one who takes parental leave. Since 2015, new shared parental leave rules mean parents can take 50 weeks off between them and receive statutory pay at least, although some employers are more generous.
Women looking after children can accrue state pension credits even if they are not working. But to get these, women must claim child benefit, which is payable for carers of children under age 16, or 20 if they are in education. Where one partner in a household earns more than £50,000 a year, some or all of the benefit will be paid back in extra tax, but it is still worth the non-earning parent claiming child benefit in order to accrue state pension.
After your pension, protecting your income is the most important financial provision you need to make. Income protection insurance, or critical illness cover, is particularly important for single women with children, who do not have another breadwinner to fall back on, because it provides an income if you are unable to work due to accident or sickness – and you can add unemployment cover too, at an extra cost. Critical illness cover can offer valuable one-off payments in the event that you or a family member becomes seriously ill. To get a quote, use a comparison website such as Comparethemarket.com.
Care of elderly parents is another challenge facing many women. While there are many situations where men will take on this responsibility, daughters rather than sons often find they are the ones stepping up to the plate.
Women taking on the role of caring for elderly parents should not be shy about being credited by other siblings for the valuable work they do. By looking after an elderly parent, you are preserving the value of their estate by avoiding astronomical care costs.
Work out a financial plan
It is essential for women to take responsibility for working out a financial plan – either with the help of a financial adviser or on their own.
The first step is to look at an online pension calculator to see where you stand, what your target should be and how much you need to pay to get there.
Moneywise recommends Fidelity’s online pension calculator, which helps savers get a clearer idea of how much they need to save towards retirement and whether they are on target to achieve that goal.
Fidelity won best pensions education initiative at the Moneywise Pension Awards 2017. For more information, visit Fidelity.co.uk/retirement/ retirement-calculator.
Don’t be daunted if the amount you need to save seems impossibly huge – you will get tax relief for money you save in a pension and even contributing a fraction of what you think you need to contribute is better than burying your head in the sand. Starting now, with however little, will make a big difference later.
According to Public Health England, a 65-year-old man can expect to live for a further 18.8 years. A woman of the same age can expect to live a further 21.2 years. This means women will need a bigger pension pot than men if they intend to take it through income drawdown, a way of drawing an income directly from pension investments.
Annuities, the financial products that give you a guaranteed income for life when you retire, have recently become generally better value for women. This is because since 2012 insurers are no longer allowed to take gender into account when setting their premiums. Because women generally live longer than men, they receive, on average, more from annuities than men do.
State pension is likely to form the bedrock of any woman’s retirement planning. State pension age for women is rising and will be 64.5 by April 2018. From 2019, both men and women’s state pension age will increase to 66 by 2020 and then to 67 by 2028.
State pension is £159.55 a week, or £8,296 a year, for the 2017/18 tax year, rising to £164.35 a week, or £8,546 for the 2018/19 tax year. You need 35 years’ national insurance credits to get the full amount, and at least 10 years’ credits to get anything at all.
Despite huge progress in recent years, financial planning remains harder for women than men. The onus is on women to sort themselves out if they want to protect their future and that of their loved ones.
Financial reward for caring responsibilities
Susan is single, 60 years old and has very little pension savings. Her 88-year-old mother, who has a house worth £1 million and assets of £1 million, is in need of care, which would cost £70,000 a year. Susan’s brother and sister both have successful jobs that take up most of their time. Rather than place their mother in a retirement home, Susan moves in with her mother – on the agreement that she will receive £40,000 more from the estate for each year she cares for her mother. On her mother’s death four years later, her brother and sister each inherit £480,000 and she inherits £640,000, after inheritance tax has been paid. Had her mother gone into the care home, each of them would have inherited £477,333.
Easy way to boost your pension
Emily is 35 years old, single, has a young child and earns £35,000 a year. She has been automatically enrolled into a workplace pension and is projected to receive an annual income from her autoenrolment pension of £2,870 from age 67, leaving her with around £9,000 a year to live off after adding in her state pension. By increasing her contributions by £75 a month – costing her just £60 after upfront tax relief – she increases her auto-enrolment pension by 39% to £4,000 a year.
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