Why many women are financially worse off in retirement

  • Describe the impact of lower salary on women's pensions
  • Describe the impact of compound investment growth
  • Explain how women can improve their situation
Why many women are financially worse off in retirement
Pexels/Karolina Grabowska

The gender pay gap has rightly become one of societies most talked about issues, but what are the knock-on effects discrepancies in pay have on pensions and retirement planning? 

The Gender Investment Gap

Despite women typically living longer than men, the average woman is set to experience a shortfall of £106,000 in pensions over her lifetime.

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With only 14 per cent of women using a financial adviser, there is a lot of work to be done by the financial services industry to encourage awareness and education around the issue to help close the gender investment gap. 

How does the gender pay gap affect savings and retirement planning? 

Simply put, a lower salary equals lower pension contributions and therefore less to live on in retirement. While this sounds obvious, it is rarely considered within the context of gender financial inequality.

The Office for National Statistics revealed that the gender pay gap among full-time employees was 7.4 per cent in 2020. It was announced that from April 2017, companies with more than 250 employees would be legally required to report their gender pay gap figures.

The resulting data has sparked overdue debate on the subject, and while the transparency has been welcomed, peripheral issues around the topic are less discussed. If not addressed, some of these issues will not rear their heads until many women reach retirement. 

There is tendency is to focus purely on the differences in base salary and bonus data when analysing the gender pay gap and total remuneration is not often considered.

Additional benefits such as pension contributions are overlooked. It is time to start looking at how differences in more than just base salary can leave women behind in the race for financial freedom. 

Currently, the minimum an employer must contribute to a workplace pension is 3 per cent of an employee’s pensionable salary, with the member then required to contribute a further 5 per cent to give a total minimum contribution of 8 per cent per annum.

It quite clearly follows therefore, that if the average salary for a man is 7.4 per cent higher than that of a woman in the UK, these 8 per cent pension contributions will also be higher as they are based off a larger amount. Here lies the first problem.  

To complicate matters even further, the divergence in pension wealth increases over time once you add the potential for investment growth. As compound growth takes effect, the larger pension pots for men grow comparatively more than those of their female counterparts and inflate the gap. 

The below (albeit simplified) example, illustrates this double-edged problem: 

Due to the gender pay gap, not only are the initial pension contributions larger for men, but the subsequent investment growth will also be greater. 

If this is extrapolated over 10 years, with both salaries assumed to have grown annually with 2 per cent inflation, the compounded investment growth exacerbates the problem:

The difference in pension contributions over the 10-year period is £1,944.67, in favour of men. Furthermore, whilst in year one the investment growth disparity is only £8.88, by year 10 this has compounded to £603.27.