How maternity leave could slash £100k off your pension – and what to do about it
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.”
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.
Five practical tips for maternity leave pensions
- Work out your rights: Make sure you include pensions as part of your discussions with HR when you’re organising your maternity leave. Ask what your company provides, as they may include enhanced pension contributions as part of their maternity package, and check what rate you’re currently paying in.
- Don’t automatically cancel your pension contributions: Many who near maternity or parental leave will be able to change their pension contributions or cancel them altogether, as it will be deemed a “life event” for most schemes. Don’t automatically assume it’s an easy way to save some cash, as the effects can last a long time.
- Work out how much it will cost you: You’ll pay pension contributions based on your maternity salary, rather than your pre-maternity pay. This means that if you pay in the same percentage contribution but it’s based on a lower salary, you’ll be putting less away. This has two sides: on the one hand it may take less out of your pay each month than you think, but on the other, you may need to make up the shortfall if you return to work.
- Talk frankly with you partner about your finances: Before you go on maternity leave you’ve got a lot to think about, but make sure that if you have a partner, you talk about the nitty gritty of how your joint finances will work while one or both of you are off work. As part of this you could agree to continue your pension contributions, with them subsidising the cost, or agree to put more money into your pension ahead of your leave.
- And finally, get the right pension credits: If you decide to take a career break then make sure that you claim child benefit. Even if you’re above the household income threshold to be eligible for it, you will still get valuable National Insurance credits from the government that will help you to build up your state pension.