Women have to make sure they are not outflanked when it comes to getting a fair deal, writes Eithne Dunne
Women in Ireland start paying into their pension at about the same age as men, and direct, on average, the same proportion (11%) of their salary into it. Yet it is projected that, on retirement, their pots will be about €120,000 smaller than those of their male counterparts.
According to a report by Irish Life, which analysed 80,000 pension members across 1,400 schemes in 2018 and 2019, this imbalance is particularly worrying given the fact that women live about five years longer than men — meaning their smaller pots have to sustain them for longer.
As Teresa Kelly Oroz, head of public policy and governance at Irish Life, explains, what causes the disparity is not a failure to take out a pension in the first place or an aversion to risk, but rather the salary gap, as well as time taken out of work to have or mind children.
“A lot of the stuff you hear about women and pensions didn’t hold true when we looked at the figures,” she says. “For example, we found no evidence that women are more risk-averse than men and are therefore not getting as much return.”
Although the average contribution rate for both genders is 11%, which is fairly high, as women are paid less than men this translates into less cash for their pension pots. Men also get slightly higher pay increases each year — at nearly every age level — perpetuating the problem, says Kelly Oroz, who adds that employers need to be careful to ensure there is no unconscious gender bias at work when doling out pay hikes.
Time out
The other big culprit is, of course, time taken to have or look after children. Even relatively short gaps in contributions can have an “enormous” negative impact on your final pot, says Kelly Oroz.
“When people are planning to take time out of work, they consider how they’ll manage with the drop in income, but often forget to consider the impact on their pension. Say you lose three years’ worth of pension payments in your thirties, it’s very difficult to come back from that.”
Women get 26 weeks’ maternity benefit from the state, after which they can take up to another 16 weeks unpaid. They lose out on pension contributions during the unpaid period, and some also lose out during the 26 weeks. That is because, while some employers will continue to pay a woman’s salary for the first 26 weeks, thereby enabling contributions to continue, there is no obligation on them to do so.
“Your employer may pay you for only a fixed period, for example four months, leaving you with no salary for two months of normal maternity leave,” says Maeve Corr, of Corr Tax and Financial Solutions.
If your employer pays your full salary for the 26 weeks, your pension contributions continue as normal — in this case your employer may arrange to have the state maternity benefit paid directly to it. However, according to Corr, it is also common for employers to reduce women’s salaries by whatever they are receiving in maternity benefit, and pension contributions will reduce in line with this. And if the salary drops enough to bring a worker below the 40% income tax threshold, she will no longer get this level of relief on her contributions.
Take extra, unpaid leave beyond the 26 weeks and you will certainly create a pension gap. And after all that, women who return to work part-time, because of caring duties, will earn less and therefore see their contributions reduced thereafter.
What to do?
With regards to the salary gap, Aileen Power, head of corporate communications at Standard Life, says women can of course pursue more pay so that the same contribution level will equal more money in their pot. After that, it is a case of finding other ways to maximise the tax benefits. “If you’re paid an annual performance bonus, you could consider contributing some or all of it to your pension scheme tax efficiently,” she says.
Oroz adds that, for anyone who can afford it after childcare and other costs, boosting regular pension contributions even by 1% for a year after you return to work will go a long way to covering the gap.
Alternatively, if you can manage to make additional voluntary contributions (AVCs), these will also help top up your pot. If doing this, says Corr, consider your timing. “Review your income and see is it more efficient to make an AVC for the previous year if you had full income and would therefore get tax relief at the higher rate.”
For married women, she advises assessing the overall situation on tax bands and pensions. “Review how your tax bands are allocated, as this may facilitate you continuing your pension contributions and obtaining relief at the higher rate. Also, it may be more tax-efficient to maximise the contributions of the higher-earning spouse. This works well, particularly when one spouse decides to work part-time.”
Maria Calvo was not too worried when she took six months’ extra unpaid leave after having each of her two children. That is because the life underwriter with New Ireland has paid as much of her salary as possible into her pension each year since she was 25.
“I saw my father retiring at the age of 53 because he had been paying into his pension since he was 19,” she says. When the underwriter, who previously worked for Royal London and Irish Life, took time off unpaid after having her children, she felt her pension could withstand the break in contributions.
“For the first six months each time, I paid into my pension as normal, but for the second six months I couldn’t. However, because I’ve always paid the max amount in, I felt that six months out of my working life wasn’t a big deal.”
In a reversal of the more typical scenario, Calvo’s husband does not have a pension. “We have a second house that we let out, and he sees that as his pension. But it’s always in the back of my mind that he should have one also.”
Calvo contributes 7% of her salary, and her employer doubles that, meaning an overall contribution of 21%. She also intends making AVCs in a few years’ time when she has the budget for it.
State pension
You automatically accrue credits towards your state pension when you are on leave to have or mind children — but this is only for the 26 weeks you receive maternity benefit. If you take a longer period, while you are still entitled to the credits, they are not automatically applied. Get your employer to complete the relevant application form when you return to work to secure this.
“Make sure the Department of Employment Affairs and Social Protection knows you are taking time to mind children; women in the past didn’t inform it and their state pension was consequently lower,” says Power.
Into the future
Kelly Oroz says that there should be a mechanism whereby a woman’s partner can contribute to her pension in a tax- efficient way while she is on unpaid leave.
“Also, when you’re not paying into your pension when on leave, you’re not just losing out on your contributions you’re also losing out on the tax relief. So there should be a way for you to get some form of tax credit for the time you are on unpaid leave,” she adds.
Power says she still comes across many women and men who do not understand the tax benefits of a pension or indeed the compounding power of contributions. “There’s a triple benefit. First, there’s a tax break of up to 40% on every contribution; second, unlike deposit accounts, your savings grow tax-free over their lifetime; and third, the majority of private pension owners can take up to 25% of their final pot as a tax-free lump sum.”
As an example of growth potential, she says someone who invested €250 a month into Standard Life’s active managed pension fund for the past 36 years would have saved only €107,750; but with a return of 8.9% per annum, their pot would be worth €627,665 after charges.
