Women need to earn £74,000 to bridge gender pension gap

New analysis from interactive investor, the UK’s second-largest investment platform for private investors and leading flat-fee platform, shows that women need to earn more than double the average salary - £74,000 annually compared to £35,000 - from aged 45 onwards to achieve the same pension wealth as men by retirement.

According to interactive investor’s calculations, women need to earn £74,000 per year between age 45 and 68 to bridge the pensions gap that has already opened between men and women by age 45. interactive investor continues to be very vocal on the gender pension gap, and the broader pension engagement gap in the UK; these calculations follow a recent report: The Great British Retirement Survey.

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The information in this release is for educational purposes only.

• Women aged 45 already face a £52,000 pension wealth gap – with average pension savings of £48,000 compared to £100,000 for men, according to government statistics
• This analysis assumes both groups contribute 8% of their earnings (3% employer contributions and 5% employee contributions) until age 68 with 5% investment growth
• This means women must contribute £495 per month (8% of £74,000) from age 45 to achieve retirement pension wealth of £450,000 by age 68. In contrast, men need to contribute £233 (8% of £35,000) to achieve the same
• Women who earn the average £35,000 salary face a £160,000 shortfall by retirement – with an expected pension pot worth £290,000, compared to £450,000 for a man, even when both earn £35,000 from age 45 and reach age 45 with an average-sized pension.

Camilla Esmund, interactive investor, explains: “These calculations are illustrative, but hopefully they’re another way to highlight the significant hurdle women are still facing when it comes to building long-term wealth.

“Despite years of progress on the gender pay gap, it’s disappointing to see so many women still struggle to achieve adequate pension savings by retirement. There are multiple factors at play which are well documented; women are more likely to have time out of the workplace or work part-time during their thirties and forties to care for family, and this translates to smaller pension values and more financial stress in later life.

“Our thirties and forties can be a significant time for us in terms of our earnings, but it can also be a time of competing financial priorities. As it stands, average pension differences begin to snowball once women hit their thirties and become more pronounced when they hit midlife.”

Taking control of our financial futures: a checklist 

While the data doesn’t make for encouraging reading, not all is lost. By taking some simple steps as soon as possible, women can take control of their financial futures and narrow the gender pensions gap.

The below tips are for educational purposes only, if you are in doubt – speak to a qualified financial adviser.

Esmund says: “A core frustration on this topic is the fact that much of this feels out of our control. Though it’s encouraging to see the government commit to looking at the gender pension gap as part of ongoing pension reform, there’s still a need to help women take matters into their own hands and gain control of their long-term financial futures.

“It’s important not to shy away from the reality of these figures, but we don’t want it to be disheartening. It is possible to close the gap even with relatively small sums, especially if you start early. Though it is also never too late to make a difference.”

1. Top up your personal contributions if you can, making the most of tax relief

Esmund explains: “There are steps you can take such as checking your annual statement and seeing if you can afford to up your contributions. The minimum amounts under auto enrolment often aren’t enough for a comfortable retirement, especially if you hope to take time out of the workplace to focus on bringing up your family. This is something to think about, and to plan for early, if you can. It’s worth remembering that personal pension contributions receive tax relief at your marginal rate, meaning every £50 payment effectively costs £40 for a basic-rate taxpayer and £30 if you’re in the 40% tax bracket.”

2. Maximise your employer’s contributions

“Don’t forget to check out the terms of your employer’s scheme – this is often underestimated. Some workplaces will contribute more to your pension if you increase your own contributions, and this could make a huge impact over time.”

3. It’s never too late to make a difference, but use time to your advantage, benefiting from the magic of compounding 

“Retirement will feel far away for so many of us, but use time in your favour. If you’re in your twenties and thirties, you could consider upping your contributions because this is when small extra amounts have time to snowball into significant sums. For example, if you contribute £50 more per month to your pension for 10 years from age 25, this could swell to £42,000 by retirement, assuming 5% investment growth.”

4. Check your maternity pension contributions

“If you’re planning to take time out to raise a family, then keep an eye on your employer’s pension contributions. Employers are supposed to pay into your pension based on your pay before maternity leave, but recent analysis by Sky showed that some firms are reducing their contributions in accidental error.”

5. Mind your fees

“Another easy win is to check how much you’re paying in pension fees. This isn’t always easy to see, but you could be paying more than necessary, which can eat away at your savings over time.”

* - based on earnings of £35,000, contributing 8% per year, increasing with inflation at 2% each year and investment growth of 5% (net of charges) pa until age 68

** - based on continuing contributions of 8% of salary, increasing with inflation at 2% each year and investment growth of 5% pa

The calculations compare a man who has a pension pot worth £100,000 at age 45, earns £35,000 and contributes 8% of his salary into his pension until retirement. This compares with a woman who has a pension pot worth £48,000 at age 45 and contributes 8% of her £74,000 salary until retirement.

Three ways to close the pension gap – depending on your stage of life

The earlier women start, the less it costs to bridge the gap, but there are other options too. These are for educational purposes only, if in doubt – speak to a qualified financial adviser.

Option 1 - Starting early (ages 22-45) - increasing contributions in your 20s and 30s is a great way to enter your forties with no gender pension gap. To reach age 45 with no pension gap at all, the average woman would need to contribute an extra £85 per month between ages 22 to 45.

Option 2 - Catch up later (ages 45-68) - if you’re already 45 with a £52,000 pension wealth gap, you’ll need to contribute an extra £262 per month to close the full £160,000 gap by retirement age.

Option 3 - Steady contributions throughout (ages 22-68) – contributing an extra £57 per month across your entire working life bridges the£160,000 gap by retirement.

*- based on a woman aiming to close a £52,000 gap by age 45 (assumes 2% annual inflationary increase in contributions, 5% annual investment growth) 

**- based on woman aged 45 who already has a £52,000 pension gap and wants to close a £160,000 gap by age 68 (assumes 2% annual inflationary increase in contributions, 5% annual investment growth) 

***-based on woman aiming to close a £160,000 gap by age 68 - (assumes 2% annual inflationary increase in contributions, 5% annual investment growth) 

Please note - these calculations are based on the current gender pension gap - the gap for someone starting their working life could be more than the current gap.