Almost 2 million single mothers are at risk of spending their retirement in poverty, according to latest analysis by Scottish Widows.
The pension provider’s ‘Women and Retirement’ report highlights the impact of the so-called ‘motherhood penalty’ on the value of mothers’ pensions at retirement. Time taken out of work and reducing the number of working hours to care for children typically causes mothers to earn less, work fewer hours and save less into their pensions.
Single mothers are most at risk of struggling to cover living costs in retirement. The report found that three in four single mothers face living in poverty when they stop working, as they are unable to share the cost and responsibilities of parenthood with a partner. Around half (46%) of single mothers have had to reduce their hours to manage childcare, or have changed to part-time work at around age 30, which typically reduces the value of their pension by an average of about £47,000.
More than a third (37%) of single mothers have left their jobs to look after children, and about a half (48%) said that having children slowed their career progression, the report said.
Jackie Leiper, managing director of workplace savings at Scottish Widows, said: “Our research shows that single mothers are much more likely to be exposed financially, cutting back in ways that jeopardise their wellbeing.”
However, the ‘motherhood penalty’ is an issue that financially affects mothers across the board, whether they are single or with a partner. According to the report, more than a third (37%) of mothers leave jobs to look after their children as they cannot afford the cost of childcare and, as a result, are on course to end up with much less in their pensions than men.
According to Scottish Widow’s National Retirement Forecast (NRF), the gender pensions gap is currently 39%. The average woman is on track to receive £12,000 per year of income in retirement after paying for housing expenses, which in today’s money is £7,000 short of the £19,000 income that the average man will get. Read more on this in our article Women and the gender pensions gap.
Leiper said: “Current economic conditions are making it harder than ever to fix the deep inequalities that underlie the pensions gap, with the retirement savings of women deeply impacted by key life events such as divorce or motherhood. Providers, regulators and employers must collaborate urgently to address this crisis– from reconsidering the auto-enrolment threshold to far greater investment in childcare support – to help the most vulnerable in the near term.”
The fact that women predominantly care for children and relatives means that while more women are now working than 40 years ago, only one in five currently works full time, according to research by the London School of Economics. The majority work part-time so that they can also look after their families, or take extended time out of work to fulfil caring responsibilities.
Working part-time means earning less money, and with that comes lower workplace pension contributions. Workplace pension contributions are usually based on a percentage of salary, so the less you earn, the less both you and your employer will pay into your pension. Also, a smaller amount of tax relief will be added compared to higher earners.
If you’ve been auto-enrolled into a workplace pension, then the minimum contribution made into your pension by both you and your employer will be 8% of ‘qualifying earnings’. Of this percentage, your employer must contribute at least 3% (but they can pay in more) while your contributions and tax relief makes up the remaining amount. This means you’ll have to pay at least 4% of qualifying earnings into a pension, topped up by at least 3% from your employer and 1% from tax relief. Read more in our article How does pension auto-enrolment work?
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Mothers who don’t return to work after having children, and therefore no longer pay into a pension at all, are likely to be particularly affected by the ‘motherhood penalty’. The longer women delay restarting pension contributions after they have children, the greater the impact on their retirement income. Meanwhile, taking time out of work could also leave women with gaps in their National Insurance record. You’ll only be entitled to the maximum amount of State Pension if you’ve built up 35 ‘qualifying years’ of National Insurance Contributions (NICs). Read more about this in our article How the State Pension works.
It’s also important to note that the potential for mothers to be promoted and therefore earn more may be reduced by working part-time or taking career breaks to care for their family. This means they often miss out on salary increases that come with career progression, and the higher workplace pension contributions these might come with.
How to beat the ‘motherhood penalty’
Mothers can take steps to potentially boost the amount they save into their pensions. Here are some tips to reduce the potential impact of the ‘motherhood penalty’ on your retirement income:
Make the most of your workplace pension
If you’re an employee, it’s worth seeing if your employer will pay more into your pension if you can afford to increase your contributions. Employer pension contributions can be thought of as a delayed pay rise that you’ll receive in retirement, and should be the first step when you’re looking to boost your pension. Read more in 11 simple ways to top up your pension.
Some employers, for example, may agree to increase the amount they pay into your pension up to a certain limit. So, if you put an extra few percent of your salary into your pension, your employer might match this, depending on their particular pension rules. Paying more into your pension also has the benefit that you’ll get more tax relief, which can give your savings a significant boost over time. Find out more about pensions and tax relief in our guide How pension tax relief works.
Claim National Insurance credits
National Insurance credits can potentially increase your State Pension by thousands of pounds in retirement. A year’s worth of NI credits equates to a 35th of your full State Pension, which works out as £302 a year, or around £6,057 over 20 years in retirement.
If you’re a mother looking after a child under 12, you should automatically receive National Insurance credits when you claim Child Benefit. Read more about these here. If you haven’t claimed these in the past, work out where you stand first to see if you’ve any missing years in your National Insurance record. Read more about how to check this and find out your State Pension entitlement in our guide How can I get a State Pension forecast?
If you have gaps where you should have received credits, get in touch with HMRC. Read more in our guide When can you claim National Insurance credits?
Talk about your pension with your family and/or your partner
If you’re worried about the amount you have saved for retirement, or your ability to save, make sure you talk to someone about this. You could discuss your concerns with your family, or your partner (if you have one). Your pay and pension income will affect your life and your family’s future, after all, so it’s an important discussion to have. Read more about how to start a conversation about money with your partner and what to talk about in our guide 10 conversations to have with your partner about money. If you’re currently not working, your partner may choose to contribute to a pension on your behalf during this period.
If you’re currently not working, your partner may choose to contribute to a pension on your behalf during this period, for example. Non-taxpayers can still contribute to a pension and benefit from tax relief. They can save up to £2,880 a year into a pension and get £720 added to this from basic rate pension tax relief. Find out more in our guide Can my husband or wife pay into my pension?
Make the most of your pension
It’s important to make the most of any pension savings you have, and you may have lost track of some. Even if you paid into a pension for a short time period decades ago, and think it’s worth very little, it’s worth tracking this down. You might be surprised by its value now. You may have alternatively completely lost track of pensions you contributed to during previous employment. Your previous employers or the Pension Tracing Service might be able to help. Read our guide How to find old pensions and trace lost pensions.
Once you have all your pension details, check where your money’s invested, the pension charges you’re paying and whether you’re comfortable with the level of risk you’re taking.
A financial advisor can help you to make the most of your pension, and talk through your options to ensure you make the right choice for you.
If you’re aged 50 or over, you can get free guidance on the options available to you from the Government’s Pension Wise service.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,000 reviews on VouchedFor, the review site for financial advisors.
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