Seven financial traps we should be warning our daughters about

The truth is that despite all the progress in securing equal rights for women in society and the workplace, their financial situation sits in stark contrast to those of men.

After a lifetime of toil, here’s what our daughters can expect unless the pace of change starts to speed up: a pension pot that is on average one-fifth the size of a man’s at the age of 65, a state pension that is a fifth smaller than a man’s, cash savings and investments worth about half those of a man, and £8,500 less in pension income per year than a man. Should they fall into the bottom 40 per cent of households in terms of income, they are more likely than not to have no pension wealth at all.

These are outcomes that should frighten every parent of young women.

Two of the main culprits behind the gaps are women’s unequal share of caring responsibilities for children and elderly parents, and their lower earnings. A reminder of that came on 20 November – the UK’s Equal Pay Day, the day in the year when women in effect stop earning relative to men. But there are other factors, too, such as career choice. Less than one-fifth of women are studying degrees with the highest pay prospects, such as technology. Having a lower paid job (something that also applies to an increasing number of men) affects women’s ability to fund pension pots and build savings. Conversely, a good, well-paid job means it is less likely a woman will leave the workforce for good when she becomes a mother.

In her manifesto for improving the financial resilience of women, Jane Portas, co-founder of Insuring Women’s Futures and author of Living a financially resilient life in the UK (see Further Reading below) picks out studying and qualifications as one of six key moments that matter during women’s lifetimes. “We earn 60 per cent of what men earn throughout our lives, and one of the drivers of that is women’s lack of technology skills,” she says.

Nevertheless, whatever their career choice, and whether they work full-time, part-time or not at all, women can take steps to help improve their own financial security.

Below we look at seven financial traps facing women in their lives, and ways to avoid or mitigate them.

Cohabiting carelessly

The number of cohabiting relationships is growing fast. It is the arrangement of choice for around 18 per cent of all couples in the UK. But cohabiting women lack the same legal rights as those who are married or in a civil partnership, for example to a share of their partners’ assets and pensions – although Scotland has introduced laws giving cohabitees some rights to make a financial claim.

In theory, it shouldn’t matter which partner takes on the role of primary child carer, but because carers lose the means to save and invest, it matters a great deal. And it’s mostly women who take on the role. Household income is rarely reallocated to maintain their savings and pensions, meaning women often expect to share their partners’ pensions. But break-up rates among cohabiting couples are considerably higher than those of married couples (according to Relate, 27 per cent of cohabiting couples will have separated by the time their child is five, compared with 9 per cent of married couples), which means the 'joint' pensions and savings pot will no longer be available to her.

Even when women do return to work and pay for childcare, studies show that the cost of it  is commonly paid solely from their salaries, again restricting women’s ability to save and invest. No surprise, then, that the view of equality charity The Fawcett Society is that where one partner is doing unpaid work, the other should contribute to their pension.

Mothers also end up neglecting their state pensions. Even though they can claim National Insurance credits towards a state pension while they look after children (up to the age of 12, or 17 in the case of disabled children), complicated child benefit rules and forms mean many miss out. If household income is too high, there is little point claiming child benefit because it will have to be paid back in full at the end of the tax year. But to get the pension credits, you must complete the child benefit forms as if you are claiming it.

“People don’t claim the credits because they don’t equate the state pension with child benefit. They waive their right to child benefit because their income is over the threshold when what they should be doing is completing the forms to secure the credits and then tick the box waiving their right to the child benefit,” says Kay Ingram, chartered financial planner at LEBC.

Couples whose income is reasonably close to the cut-off for child benefit pension contributions should always explore whether making extra pension contributions could reduce their income and make them eligible for child benefit. “Not only would they then receive extra tax relief at 40 per cent, they will get the child benefit – which can also be back-dated – and the non-earning spouse will then automatically pick up state pension credits,” says Ms Ingram.

Cohabiting women face other risks, too. They may not be entitled to a share of pensions, savings, investments or property held in a partner’s name following a break-up, and have no inheritance rights, even if they have children together, unless they are named in their partner’s will. They could face inheritance tax bills, and there is no capital gains tax exemption for non-spouses and non-civil partners.

A cohabiting woman has no automatic right to her partner’s workplace pension if they die, and many pension schemes will only pay out to spouses or civil partners. You could end up with a complicated legal battle.

Actions to take:

·         Pension contributions are an essential not a luxury. If you cannot fund your own pension, household income should be used to fund it – see box out below (Pensions are for everyone) on how to do this

·         Complete child benefit form CH2 to secure state pension credits if you are entitled to them. Details are at https://www.gov.uk/national-insurance-credits

·         Explore whether additional pension contributions from household income would make you eligible for child benefit

·         Write wills naming each partner as the other’s main inheritor

·         Buy life insurance with named beneficiaries

·         Use a solicitor to write a cohabitation agreement outlining who owns which assets

·         Ask your partner’s workplace pension to list you as a beneficiary

·         If your partner has a Sipp, ask them to complete the paperwork nominating you as their beneficiary.

·         Keep your savings and investments in separate or joint names rather than in one name only

Not yet an IC subscriber? Try 4 weeks for £4

Assuming marriage guarantees financial security

In lots of ways marriage and civil partnership provide plenty of financial security. After all, there are significant tax benefits relating to inheritance and capital gains, and you have pension and Isa rights too.  

But married women can improve their financial security further still – and their overall household income – by having their own pension. If you need to take an extended break from work, or give it up entirely, first consider how you will maintain your retirement savings and make it part of the family budget. “Having an unequal status where one’s got all the pension and one’s got nothing doesn’t make sense,” says Ms Ingram.

Couples might assume that it makes sense to stash everything into the highest earner’s (usually the man) pension to secure maximum tax relief. But by funding two pots, the couple will benefit from the use of two personal allowances (currently worth £12,500) when the pension is eventually paid out. “A couple who have each got £27,500 coming in in pension income are going to be £3,500 a year better off than a household where there is one person getting £55,000,” says Ms Ingram.

As outlined above, mothers should ensure they claim state pension credits by completing child benefit forms, and explore whether adjusting pension contributions would make them eligible for child benefit payments.

Grandmothers who care for family members under the age of 12 (17 if disabled) for free can also claim state pension credits (and they can backdate this to 2011), if they are aged under 66 themselves.

Another risk is not knowing what investments and assets you jointly own with your partner or how to manage them if they die. “Often management of the finances will be passed on to a son-in-law or other relative to take care of things, but this may not be in the woman’s best interests,” says Ms Ingram.

The IWF warns that women are twice as likely as men to suffer financial abuse in later life, with family members often the perpetrators.

Actions to take

·         Set up your own pension and pay in the maximum you are entitled to

·         Claim state pension credits if you are entitled to them

·         Explore whether additional pension contributions from household income could make you eligible for child benefit

·         Don’t take a back seat on household finances. Know what assets you both have and how to manage them so you can stay in control should your partner die

·         Get life insurance and regularly update your wills

·         If your spouse/civil partner has a Sipp, ask them to complete the paperwork nominating you as their beneficiary.

Divorcing disastrously

Around 40 per cent of marriages in the UK now end in divorce. Whenever this sadly happens, an agreement needs to be reached on how to divide savings and investments and assets such as the family home, often by employing a mediator or solicitor.

Although pensions should be included in divorce settlements, they are ignored in as many as 70 per cent of agreements. Many solicitors fail to flag it up as well.

There are two main reasons why pensions are overlooked. The first is that for women, their priority is often to keep the family home, so it is the asset they fixate on. “They might declare that they don’t care about the pension as long as they can keep the house, but they do not necessarily understand the value of what they are giving up,” says Ms Ingram. “Solicitors often don’t know either, but a pension can be worth twice the value of the house.”

Valuing pensions is also time consuming and complex. Expert witness reports, which can cost around £1,000, can be off-putting, too.

It’s also worth paying attention to rule changes and changes in legislation. Currently many divorcees of a certain age miss out on a higher state pension because they don’t realise they can substitute their ex-husband’s National Insurance record for their own. But they must apply for this themselves – the Department of Work and Pensions isn’t obliged to alert them.

Ms Ingram has one further piece of advice for a divorcing spouse: don’t get on the wrong side of the divorce line before you distribute assets. This is because there could be huge financial implications once you are no longer a spouse. If your husband dies soon after the decree absolute comes through, you could lose the automatic entitlement to pension death-in-service benefits as you are no longer a spouse.

Actions to take

·         Keep all assets including pensions on the table in divorce negotiations so that a fair split can be achieved

·         Agree a financial settlement before divorce occurs

Reckless conservatism

Growing wealth requires investing. Yet when they do set money aside to invest, many younger women consider this to be money they cannot afford to lose and select the lowest risk option. In a 2019 survey, Cass Business School found that women continue to be more risk averse than men, with young people are particularly loss averse. HMRC data show more men than women open stocks and shares Isas, while women are more likely to open cash Isas. The latter will barely grow at all, and is likely to deliver negative real returns.

You cannot have your investment cake and eat it. Reckless conservatism means lower returns and a small pension. According to Fidelity Investments, a stocks and shares Isa in one four-year period would have left an investor who put the full allowance each year in £16,600 better off than a cash Isa saver at the end of those 48 months. If you are investing over a multi-decade time horizon, you can afford to take risk. Time and a well-diversified portfolio in themselves will reduce the risk.

Actions to take

·         Make time each month to focus on your finances, examine performance and learn about investing to make informed decisions about your investment pots

Depriving yourself of a better pension

Low pay, part-time working, saving for a house deposit and high rent are some of the many barriers to young women saving for a pension. But by declining to join or delaying joining an employer’s scheme – or paying in the minimum you can – you are switching off a key driver of returns: the power of compounding. There’s no point telling yourself that you have time to catch up – you don’t (see chart).

Auto enrolment is a great starting point. The net cost to you is 4 per cent of your earnings, but the amount going into your pension is double that. On its own, though, it’s not enough. Small additional amounts are worth making for the tax relief on top. “It’s better than doing nothing and you are probably not going to miss the money at that level anyway,” says Ms Ingram.

As a rough guide, stock broker Brewin Dolphin reckons that if you put aside £660 a month for 35 years, you will eventually have a pot of £750,000 assuming growth of 5 per cent a year. This would be enough to pay you a pension income of £30,000 a year. For higher-rate taxpayers, the net cost to you of that £660 is only £396 because the government pays £264.

Actions to take

·         Aim to pay in the maximum you can to your employer's pension at every job. There is nothing wrong with having lots of different pension pots, however small. But keep track of them and keep your details up to date at each plan

·         Make sure your default pension age is correct. If it’s set too low – at 60, or 62 – and you intend to retire at 68, as an average earner you could lose £10,000 from your pot, reckons Aviva. This is because pensions are de-risked as the member approaches their set retirement age

·         If you get a bonus, consider topping up your pension pot. Remember, when you have used up the current year’s allowance, you can then use up unused pension allowance from the three previous years. This allows you to max your contributions and claim a big chunk of additional tax relief. 

Maternity mistakes

Some women expecting a baby consider coming out of their workplace pension scheme as a way of saving money before their income drops and their costs rise. It always seems to be the woman who makes the sacrifice, and it’s not worth doing anyway, says Ms Ingram. She explains that “they will save a tiny sum in terms of their own contributions and potentially be giving up thousands of pounds in employer contributions”.

For women in salary sacrifice schemes it is particularly costly to stop their contributions because the employer is contractually obliged to pay the whole pension contribution for the period of maternity leave. For little gain, a lot can be lost in exiting the pension.

LEBC case study: Not worth it

A mother to be who earns £32,000 and pays 4 per cent of her salary into her employer’s pension scheme on a salary sacrifice basis, decides to opt out three months before her year’s maternity leave starts. She currently pays in 4 per cent of her salary though salary sacrifice. Doing this means she would save in total £217.60 but forgo employer contributions of £4,480. 

Actions to take

·         Maintain your pension contributions during maternity leave

·         If you are self-employed do not ignore your own pension savings. Set up a low-cost plan and start contributing

Preferring part-time

Going part-time is like taking a hammer to pension wealth. Earnings form the basis of your pension savings – the more hours, and years, you spend in paid work, the greater your retirement rewards. 

As a part-timer, not only will your earnings plunge, but you will be earning 30 per cent less per hour than women who work full time “and your pension pot will be 47 per cent at age 60 less than a woman’s who works full-time”, says Ms Portas.

Even worse news is that most part-time workers do not qualify for auto-enrolment because they earn less than the £10,000 threshold, and more than 75 per cent of this excluded group are women. Around 42 per cent of women work part-time compared with 11 per cent of men, and 81 per cent of part-time workers in the UK are women. 

Actions to take

·         Continue to pay into a pension and secure tax relief even if your salary is very low. Ask to join your employer’s scheme even if they believe they do not need to invite you, or set up your own plan – see pension box below for further details

·         Discuss with your partner how household income could be invested more equitably

·         Avoid cancelling pension contributions when money is short. You are robbing your future self of vital funds

To summarise, make sure you have your own pension whether you work or not. Do not assume your partner’s pension will be available to you in later life. If you are cohabiting and planning to have children discuss how household income could be diverted into savings and pensions for both of you. If you have a partner, talk to them about financial equality within the household and ensure that childcare costs are shared. You should know what assets and savings you jointly own and how these might be managed. Make sure you have up-to-date life insurance and wills and complete beneficiary forms for all pension pots. Look at your pension pot regularly so you can see how the contributions are amassing. 

Pensions are for everyone

Everyone can have a pension even if they are not working. Non-working women can pay in up to £2,880 a year, which will be topped up with a government contribution of 20 per cent, making a total annual amount of £3,600.

If you are working, are aged at least 22 and earning £10,000 a year (from the same employer), you will be auto enrolled into your employer’s pension scheme. The minimum amount that must be paid into this pension is 8 per cent, made up of 4 per from you, 3 per cent from your employer and 1 per cent from the taxman.

Many employers offer more generous terms and some offer defined benefit pensions that guarantee the level of income you will receive in retirement. 

You can ask to join an employer’s scheme even if you earn below £10,000, but check that you will get tax relief because the way some schemes are set up means you won’t. In that case you should pay into a government sponsored scheme such as NEST.

Want to read more on this? Subscribe for 4 weeks for just £4