How even five-year career breaks can hit women’s pensions for decades

Career breaks and reduced hours are often shaped by caring responsibilities, the cost and availability of childcare, and the realities of balancing work and family life. This, however, can have a big impact on women’s pensions.

New calculations from interactive investor, the UK’s leading flat-fee investment platform, demonstrates the significant impact of even a five-year career break in women’s 30s and 40s, as well as the small steps women can take to help bolster their pensions until policymakers come up with solutions.

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Camilla Esmund, Head of Investor Campaigns at interactive investor, explains: “The evidence is clear: career breaks and the move to part-time work can have a lasting impact on women’s financial futures. We need to take this seriously, because as it stands, many women across the UK are at real risk of retiring with less financial security if something doesn’t change.

“As women, our financial lives can often look different. Unfortunately, the impact of the so-called motherhood penalty continues to show itself. Taking time out of work for childcare or caring has a knock-on impact: it changes our earnings and our contribution patterns to pensions. Plus, the UK has some of the highest childcare costs in Europe, putting a further strain on our finances, meaning women are often making sacrifices that impact their ability to build long-term wealth.

“Although the focus of these calculations is on pensions, this is a much broader issue. After all, lower earnings and reduced working hours can also limit women’s ability to build emergency savings and long-term investments, widening the broader gender wealth gap over time.”

Assumptions for the table below: these women take the average full-time salary for their age (30 and 40). These women then each take a five-year career break (with no earnings) and return to work three days per week (on the same salary plus 2% annual inflation). Salaries are from ONS average wages data.

These are just illustrative examples. More broadly, data suggests that many women tend to continue in part-time work once they enter midlife/have children.

Below for reference: ONS data comparing the proportion of men versus women who work full time at different ages

Commenting on the calculations, Camilla Esmund, adds: “The ONS data shows the full-time work gap widens in midlife, and our analysis suggests that even a five-year break at 40, followed by a return to three days a week, could leave an average earner over £133,000 worse off in retirement, and a higher earner nearly £249,000 worse off once lost contributions and compounding are included. But it doesn’t stop there. We can see from the data that women are less likely to work full-time as they get older, potentially going back to work on a part-time basis instead.

“In those later years, it can be a good opportunity to bolster our retirement savings as much as we can…but understandably this won’t always feel doable for women who have been out of work for extended periods, and are now earning less, dealing with the increased cost-of-living, and juggling everything else.”

What women can do to bolster their pensions and long-term financial toolkit

Esmund adds: “While policymakers have said they are committed to addressing the gender pension gap, in the meantime we must help empower women to do whatever they can, even if it’s small - to take matters into their own hands. It won’t always be easy, but there are steps women can take to feel more in control. The earlier women can engage with not just their pension savings, but their finances more broadly, the better. Think of it as your long-term financial toolkit - what do you have? Where are the gaps? How does your current life stage, family plans, or preferences align with what you have in your toolkit? With any investment, like a pension, time is your greatest asset. But it’s also never too late to make a difference.”

• Maximise your workplace pension: “If you’ve spent years out of the workplace, it’s worth considering whether you’re now able to start topping up your pension savings by putting more each month into your workplace scheme to make up for that lost time, or by setting up a separate personal pension. With a workplace scheme, your employer may match some or all the extra you choose to contribute. And if they operate a salary sacrifice scheme, your payments will escape national insurance as well as income tax, putting some extra money in your pocket.”
• Round-up lost or misplaced pensions: “It’s easy to lose-track of old pensions, but rounding these up can be a great way to make you feel more in control of your pension – and it’s something you can do which doesn’t need any extra funding. You can do this by either using the government’s online tracing service or contacting your previous employer(s). Next, you may want to consider merging several into a single plan, which you can do within a SIPP (self-invested personal pension) because this can help make it much easier to keep track of your pension pot, going forward. It can also help you keep an eye on fees, too. Just ensure you don’t lose any valuable guarantees in the process.”
• Use other tax-efficient savings vehicles to your advantage, if you can: “Depending on your financial circumstances, you may also be able to look at other investment vehicles like an individual savings account (ISA), as a tax-efficient way to top-up your financial toolkit. The good news is, even small but regular contributions can really add up over time thanks to the magic of compounding. Plus, regular investing can help drip-feed money into the market, helping to smooth out volatility.”

Explore the tools available: “We know from our data that women are fantastic long-term investors; building well-balanced SIPP and ISA portfolios. interactive investor has a dedicated forum called ii Community, designed to help investors share insights, knowledge, and ideas. This is a valuable space where you can learn from other like-minded women building their pensions and long-term financial toolkits. Plus, there are so many other brilliant educational tools and insights out there. interactive investor has a podcast called ‘On the Money’, which aims to cut through financial jargon and get to the heart of what investors need to know across a range of topics, as well as bespoke, personalised, tools such as ‘ii Investment Coach.’”