Women mind the gap

The pensions industry should not roll over and accept that women are destined to retire on less money than men says Ian Naismith, head of pensions market development, Scottish Widows

Pension provision for women has become an increasingly prominent issue in recent years. The Scottish Widows UK Pensions Report has consistently revealed that women are much less well-prepared for a comfortable retirement than men. This year 46 per cent of women are saving adequately by our definition, compared with 55 per cent of men. It’s also dangerous for women to rely on their husband or partner, because in 81 per cent of divorces pensions are not even considered. Under half of married people think it is very important to provide a pension for their spouse after their death.

A great deal has been achieved in the last few years to give women fairer state pensions. The number of years of National Insurance contributions or credits needed for a full basic state pension is being reduced to 30, the system of credits for carers is being improved and the last piece of the jigsaw was recently put in place when Baroness Hollis’s proposal to allow up to nine years of missed contributions to be bought back close to retirement was finally agreed by the Government.

However, while the imbalance in state pensions is being drastically reduced, the same is certainly not true in private pensions. Women are lower paid than men on average, are more likely to have career breaks and because of that are less likely to be members of defined benefit schemes (unless they work in the public sector). Both opportunity and affordability militate against women preparing for retirement. So should we give up and accept that women will be worse off than men in retirement, and more dependent on the Government? I believe that would be a big mistake.

One feature of current legislation is that it is often better for couples to make pension contributions for the partner who is earning the higher income. At the extreme, if one is caring full-time, a maximum of £3,600 gross can be paid into their pension with tax relief, whereas the contribution for the partner in employment can be up to their full earnings. When both are earning, if one partner (usually the man) pays higher-rate tax it is better to contribute to their pension to maximise the rate of tax relief. A relatively simple change of legislation would allow individuals to make payments to pensions of their spouses or registered civil partners and have them treated like contributions to their own pension for the purposes of limits and tax relief. This would allow both partners to build up their own pension, which is much better than just one of them being provided for.

A second issue that could be addressed is the reluctance of many women to tie their money up in a pension when it could be needed for their family at some stage before retirement. When women start a family their children usually become the financial priority, even at the expense of their own future. Having the potential to access pension funds before retirement would encourage more women to save.

The Pension Policy Institute recently published a research paper looking at options for allowing early access to pension funds with suitable controls. Four options are considered: allowing loans to be taken from pension arrangements (this is based on 401(k) plans in the US); allowing permanent withdrawals to be taken, with some loss of tax relief; developing ‘feeder funds’ where there is instant access, but with automatic movement into pension once the fund reaches a certain level and allowing some of the tax-free lump sum to be taken before the minimum pension age.

All these options have benefits and drawbacks, but the final one, which is another of Baroness Hollis’s proposals, seems to me particularly worth investigating. It is in principle not much different from what can already be done, because it is possible to take the lump sum, currently from age 50, and defer taking any pension income. This proposal simply extends the facility to a younger age, at no overall cost to the Government. Upper and lower limits would help prevent abuse, and there would be no value judgements needed on whether the individual was in real need of the funds.

Creative thinking like this is important if we are to give women more pension opportunities. Employers should also consider whether their pension arrangements may unintentionally disadvantage women, for example through long waiting periods. And we need to provide better education and guidance on the importance of retirement planning to ensure that women give it higher priority. The pensions gap is likely to remain for the foreseeable future, but with a concerted effort it can certainly be closed.