Gender pension gap: why women end up with smaller incomes in retirement

Calls for introduction of a 'carer top-up' and amendments to minimum income threshold for the workplace pension scheme.

It’s no secret that there is a gender pay gap, with men on average earning more than women. But this issue isn’t confined to the working world, as it is also having a real knock-on effect to the eventual pensions enjoyed by men and women.

A new report from NOW: Pensions and the Pension Policy Institute has thrown light on just how pronounced the gender pension gap is.

Its research found that the average private pension income for men aged 65 or over is worth £8,620 a year.

In contrast, women typically enjoy an annual income of a paltry £3,920 from their private pensions, a massive 55% gap.

So why are women being let down by the pension system at the moment? And what can we do to fix it?

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The part-time pension penalty

A significant factor here is the hours people tend to work.

Women are more likely to take on part-time work, perhaps after having children or in order to help with the care of older and more vulnerable family members.

This has a number of implications for the earnings of women over their working lives ‒ obviously, they earn less while they are part-time than full time, but it can also interfere with their career progression, leaving them earning a significant amount less by the time they retire.

And with less money coming in, it should be no great surprise that their contributions to personal pensions are also lower than men.

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The workplace pension revolution

Which brings us onto workplace pensions, or the auto enrolment scheme to give it its grander title.

The scheme has been a brilliant success, helping millions of people to start saving into a pension or at least increase the amount they are putting aside, meaning a more comfortable retirement.

Bosses are forced to open a pension on behalf of their staff, and then contribute towards it ‒ it’s effectively a payrise, albeit one you can’t touch until you retire.

The trouble is that not all staff are eligible ‒ you need to earn £10,000 a year in order to qualify for automatic enrolment (though some generous employers will still take part even if you earn less than that).

And according to the report, a massive three million employed women fall below that earnings threshold, compared to around one in ten (12%) male workers.

This is simply adding making a bad situation even worse. Women are already facing an uphill battle building a decent pension pot given their less straightforward career path and incomes.

But they are also the most likely to be excluded from the Government scheme specifically designed to help people save in a pension, and boost those pension pots.

Of course, it’s worth remembering that plenty of people ‒ again, more likely women ‒ are missing out on workplace pensions even if they are earning above £10,000 because that income is split across two or more jobs. 

The report found that including income from additional jobs would mean a further 80,000 would pass the £10,000 threshold for auto enrolment, with 60,000 of that total women.

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What can we do to improve women’s pensions?

There are a couple of steps that can be taken which would make the current pension setup fairer, and most likely provide a significant boost to the pension pots women end up with.

The first would be addressing the minimum income thresholds that apply to workplace pensions. 

The £10,000 figure is simply too high ‒ it needs to be lower, and if possible it needs to apply across your gross income, not just your income per job.

There is also the option of adjusting the scheme so that it treats people who take on a carer role more fairly.

Baroness Jeannie Drake, who played a role in designing the auto enrolment scheme, has called for a review into the possibility of adding top-up payments for those who work reduced hours so that they can care for loved ones.

She said: “A ‘carer top-up’ for those who are missing out on workplace contributions would make a real contribution towards their pensions.

This would help approximately three million women, in addition to 300,000 men, to top up their pension savings whilst taking time out of work to be carers.”