Are you paying the motherhood penalty on your pension?

Written by Lori Campbell on 6th Jul 2018

Women could close the gender pension gap by paying just 1 per cent more into their pension pot each month, according to a new study by Fidelity International.

The state of the nation report, The Financial Power of Women, used research based on interviews with 1,000 women and 1,000 men. Its findings reveal that young women putting money into a pension in line with the government’s auto-enrolment contributions are likely to end up with a pot that is significantly smaller than for men.

Fidelity International’s investment director Maike Currie, said: “Financial inequality is one of the greatest challenges we face today. We live longer, earn less and are more likely to take career breaks or work part-time. To unlock the financial power of women, we need to address the personal, professional and policy barriers stopping women from investing.”

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Women in their late 20s and early 30s face a pension pot that is 11 per cent smaller pension pot than men, according to the report carried out by Opinium Research. Based on projections from the Office for National Statistics and adjusting for inflation, the average man aged between 25-34 is expected to have a pension pot of £142,836 at the state retirement age of 68.

However, the average woman is expected to have a pot of only £126,784. This is primarily as a result of women still earning less and taking time off to bring up children (the ‘motherhood penalty’) or care for elderly relatives (the ‘good daughter’ penalty).

To help close this gap, Fidelity suggests that women should invest an extra 1% of their salary, an average of just £35 per month over 39 years. It says women also need to become more engaged with their pension investments.

Over half of the women surveyed said they did not know where their pension is invested and close to a third did not know how much it is worth. Meanwhile, women were also more likely than their male counterparts to hold a cash ISA rather than a stocks & shares equivalent.

The report, which coincides with the 90thanniversary of women securing equal voting rights, identified a number of barriers preventing women from investing. These include a lack of trust and understanding regarding the investment industry.

Over one in 10 women surveyed do not feel comfortable choosing financial products and services. This is twice as many as men. The study found that more women than men described the way investment is communicated as ‘complicated’, ‘incomprehensible’ and intimidating. Women also still prefer the perceived ‘safe haven’ status of property with two-thirds (67%) believing property offers an equal or greater security than investment products.

Other limitations stopping women from investing include lower salaries, as well as household costs and chores. Just under a third of women said that a salary increase would encourage them to invest. This highlights the fact that the gender pay gap is still holding women back from taking more risk with their earnings. Almost a quarter (23%) of those interviewed said a reduction in household costs would help them to invest more each month.

Ms Currie said confusing jargon and a lack of prominent women in the investment industry has contributed to lower investment by women than men.

She added: “On a personal level, women still shy away from risk and prefer the perceived safe haven status of cash. On a professional level, the investment industry needs to do more to build trust and an understanding of their products and services among women.

“Finally, at a policy level, we need to look at the way pensions are designed and question whether they take account of the unique life choices and challenges women face.”

To address these issues and help women to GET INvested, Fidelity International will use the analysis from its report to inform its Fidelity Women & Money Innovation Labs. These Labs will bring together industry, government, influencers and the media to identify ways of unlocking women’s financial power.

Ms Currie said: “This is about doing all we can to get the other 50% of the population to harness their financial power – the breadwinners, homemakers, the ones looking after the family, caring for sick and/or elderly relatives, managing the purse strings and teaching the next generation about money. We all need to ‘GET INvested’ and close the gender pension gap.”

While women are chronically under-represented in the investment industry, you can see here how women are trying to change this for good.