Five vital pension tips for women

The UK pensions system has long been tipped in favour of men. Here's how women can fight back.

For pensions to work at their best they need plenty of time to grow in value. This is why the pension system in the UK actually works better for men who generally take less career breaks than women. Men are often able to build up their entitlement to the basic state pension more quickly and, as they also often end up earning more money, have more opportunities to contribute to their own personal pension pot, or take advantage of employer pension schemes.

With the pension regime skewed in favour of people who can work for a greater number of years, the gap between pensions for men and women continues to grow. According to Prudential, women who take their pension in 2010 are expected to receive £7,424 less in income every year than men. Worse still, women’s pensions have dropped off by 11% since 2009, while the gender gap has widened by £782.

The table below predicts how pensions will shape up in 2010 compared with 2009:

Pensions: 2009 versus 2010

Women’s pensions are expected to fall significantly behind men’s with those retiring this year receiving almost 38% less income. So how can we stop this happening again in the future? Here are five vital pension tips every woman needs to know.

Five vital pension tips for women

Women’s pensions often suffer as a result of taking a career break to care for children or elderly relatives, but these tips will help you to prepare:

1. Start saving as early as you can

When it comes to pensions the earlier you start saving the better. You can prepare in advance for a career break by starting a pension at the earliest available opportunity, ideally when you first start working.  

Even if you have to cancel your contributions when your salary stops, the payments you made before your career break will continue to grow in your pension pot, thanks to the miracle of compounding.

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Think about it this way: Let's say you started saving in your pension at the relatively young age of 25, but at 35 you stop to have a baby and you never pay into your pension again.

Surprisingly, you could actually end up with the same sized pot at 65 as someone who didn’t start until they were 35 and contributed for the next 30 years (all things being equal) even though you only made contributions for a decade. So an early start really is a no brainer.

2. Continue to save during career breaks

Not so very long ago everyone had to have earnings before they were able to invest in a pension. Thankfully this is no longer the case. Nowadays you can pay up to £3,600 gross per tax year - that’s £2,880 out of your own pocket - into a pension even if you have no income whatsoever.

Of course, pension affordability could be an issue during a career break. But don’t forget it’s perfectly acceptable for a spouse or partner to pay into a pension scheme on your behalf. The important thing is that you carry on contributing whatever your budget will allow even if that means reducing your payments a little.

3. Know your pension rights during maternity leave

During your paid maternity leave you’ll be treated as if you were in normal work. Any pension contributions made by your employer on your behalf into a work-based scheme will continue as if your salary had remained unchanged. What's more, these contributions will take into account any pay increases you would have been awarded had you not gone on maternity leave.

If you were making your own contributions into the scheme, you'll be able to continue while you’re on maternity leave. However, your contributions will be based on the level of pay you’re actually receiving - not your pre-maternity leave salary. If you stop making payments into the scheme you should check if there are any penalties. This is unlikely with newer style pension schemes, such as stakeholders, but may apply to older plans.

It’s important to be aware that any extended - that is, unpaid - maternity leave doesn’t count as pensionable service, and therefore your employer isn’t obliged to carry on making contributions to your pension. (That said, more generous employers may be willing to keep funding your scheme).

4. Protect your basic state pension

To qualify for the full basic state pension everyone needs to have paid enough National Insurance Contributions (NICs) which are deducted from salary. On current rates this amounts to an income of almost £5,000 a year. To ensure you don’t fall behind during your career break you should claim Home Responsibilities Protection. You’ll qualify for this automatically if you’re getting Child Benefit in your name for a child under 16 (and you have given the Child Benefit Office your national insurance number).

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5. Think outside the pensions box

Finally, remember that pensions aren't the only way you can save for retirement. If contributions from your employer are now a thing of the past, or you don't intend to return to work after your maternity leave has come to an end, you could enjoy equivalent tax breaks - and greater flexibility - by putting money into ISAs.

From 6 April 2010 the total annual ISA allowance is stepping up from £7,200 to £10,200, of which up to £5,100 can be paid into cash ISAs each tax year.

Many people prefer ISAs because, unlike pensions, there are no restrictions on when - and how - you can take money out. And since ISAs aren't linked to your employment or salary in any way, they may suit your lifestyle better especially if you won't be working for many years.

If you need more help with planning for your retirement, don’t forget to ask the lovemoney.com community for help using our excellent Q&A tool.

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