New research from Aviva has found the Gender Pension Gap begins to widen significantly from the age of thirty-five. Based on the workplace pension employer and employee contributions of just over 2 million savers and retirees, the gap between men and women’s pension contributions for 35 to 39 year olds is 18%. It then increases to 23% for 40-44 year olds and 29% for 45-49 year olds. It then stretches to 35% for 50 to 54 year olds.
This suggests a clear line in the sand around the age that women are often making milestone career and childcare decisions and opting to work part-time.
Table 1: Gender Pension Gap by pension contributions
|Age||Gap in pension contributions between women and men|
The amount paid in contributions has a big impact on what is received at retirement and the difference between men and women’s contribution rates is stark (as shown in Table 1).
For most people, the effect of working part-time means a reduction in contributions paid into their pension. If a person opts to reduce their full-time working hours to three days a week, they might expect their pay and their pension contributions to reduce by 40%. However, because of auto-enrolment (AE) thresholds, the impact can be greater than that.
A person earning £30,000 opting to reduce their hours by 40% would see their pay reduce by 40%. However, because of the lower qualifying earnings threshold (LET) under AE, their pension contributions would reduce to around 50% of their full-time value. A worker earning £20,000 would see their pension contributions reduce by over 58%.
Emma Douglas, Director of Workplace Savings & Retirement said: “Pension contributions are unlikely to be a deciding factor when considering whether to work part-time. What is important is that people understand the long-term impact on their pension when they are making that decision. This is crucial to good financial planning. Some people might consider upping their pension contributions, but this would have to be carefully balanced against disposable income. Another option some parents may consider is sharing the caring responsibilities to help spread the long-term financial impact.”
Remove auto-enrolment thresholds to level up pensions
One significant change government could make to help women in this position would be to remove the LET. It has the potential for the biggest impact on closing the Gender Pension Gap because it would mean women in a pension scheme would get a contribution from the first pound they earn. It can be implemented without the need for legislation and has already been promised by government for the “mid-2020s”.
Emma Douglas said: “We welcome the recent freeze of the lower qualifying earnings threshold (LET), particularly because we support a phased approach to its eventual removal. This is acutely important right now. With inflation hitting record highs and the increased cost of living, it is set to be a financially challenging year for many, and long-term savings might not feel like a priority.
“We are calling on government to put a ‘roadmap’ in place now for how and when it will implement the removal of the LET . There is never a ‘perfect time’ to increase pension contributions, but a phased approach should help to ease any sudden financial impact on employers and employees. Employers and employees need time to plan. The clock is ticking and the longer it does, the less there will be in the pension pots of part-time working women.”
Abolishing the lower qualifying earnings threshold would increase pensionable pay by up to £6,240 per year and total pension contributions by £9.60 per week for everyone who earns more than £6,240 a year. This could mean up to an extra £115,700 in pension pots at retirement.
Table 2: Aviva Data – Additional Pension Pot at retirement, by age
|Age when lower qualifying earnings threshold is abolished||Additional Pension Pot
at 68 years old