How maternity leave could slash £100k off your pension – and what to do about it

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If you’re going on maternity leave or returning to work part-time, stopping your pension contributions might seem like a good way of recouping some cash. But doing so could cut the amount you have at retirement by as much as £100,000.  

Women are paid lower salaries than men throughout their working life thanks to the gender pay gap, but those who take time out to raise children are hit again at retirement if they stop contributing to their pension.

In fact, two year-long breaks in pension contributions could leave women almost £25,500 worse off when they come to retire, analysis shows.

And a woman who returns to work part-time could see £100,000 wiped off their pension pot.

Laura Suter, personal finance analyst at investment platform AJ Bell, which carried out the research, said: “Your pension might understandably be pretty low on your radar when you’re pregnant and going on maternity leave, but the figures show the difference a small decision like choosing to cancel your contributions can have on your long-term financial plans.

“It may seem like a small amount of money in the short term but the compounding effect of investment returns over the long period until retirement means that the effect of stopping contributions snowballs.”

Paying in vs stopping contributions

To assess the financial impact of stopping pension contributions, the AJ Bell researchers used an example of a woman earning the average UK salary. They said she would have £368,580 at the age of 65, assuming she had contributed 5% a year to her pension and her employer had contributed another 5%, with estimated investment growth of 4% a year.

If that woman took a year-long career break at the age of 30 and another year-long break aged 33, and stopped all pension contributions in that time, her pot at retirement would be £25,493 lower.

But if she had continued paying into her pension at 5% of pre-maternity salary, she would only miss out on £13,905.

If the same woman then returned to work part-time, working three days a week until her youngest child reached school age, and started paying contributions again, based on her lower pro-rated salary, her pension pot would be £46,857 smaller.

If the woman had taken a five-year career break at the age of 30, with no pension contributions in that time, and then worked four days a week for the rest of her working life, based on the average salary for her age, she would have £100,845 less in her pension compared to someone who had taken no career breaks and had worked full time.

Suter said: “There’s a real incentive to keep paying into your pension when you’re on maternity leave because you could pay less than usual, but your employer will pay the normal rate.

“If you keep up your pension contributions, they will be based on your maternity pay not your usual pay, but your employer will maintain their contributions on your usual, pre-maternity pay.”

The alternatives

If maintaining your contributions while on maternity leave isn’t an option, you could get your partner to pay them. To get your employer’s contribution you would have to keep paying your pension contribution out of your salary so your partner would have to make up the shortfall by paying into a bank account.

You could also ramp up the amount you put into your pension when you return to work to make up some of the shortfall.

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