The impact on pension and pay during maternity leave
The financial impact of motherhood beyond the cost of nappies, clothes, buggies and childcare are not so obvious. Below we outline what mothers can expect in terms of maternity pay, pension and returning to work.
Maternity leave payment terms and conditions often depend on your employer. But in general, you can take up to 52 weeks and will receive an income for the first 39 weeks from your employer. Statutory Maternity Pay (SMP) sets the minimum for this.
If you are eligible to receive SMP as a minimum you will get 90% of your average weekly earnings for the first six weeks of your maternity leave, then for the next 33 weeks it falls to £140.98 per week (2017/18) or 90% of your average weekly earnings, whichever is the lower. For many this is a steep fall in income. Your employer may pay more than the statutory amount, so it’s worth finding this out, before you go on maternity leave so you can manage your financial expectations.
What happens to your pension when you’re on maternity leave?
As a result of auto-enrolment, the vast majority of working women will be saving in a pension scheme. The good news is that during any period of paid maternity leave you will continue to build up a pension, so it’s important that you continue to remain a member of your workplace pension scheme.
Your employer will continue to pay pension contributions as long as you remain in the scheme, based on the salary you received before you went on maternity leave. But you only need to pay pension contributions based on your actual earnings during maternity leave, so this includes any SMP and any top-up pay from your employer. If your employer matches your contributions, they must continue to match the contributions you paid before your maternity leave started. However, you won’t receive any employer contributions during any periods of unpaid leave.
Returning to work – think about topping up your pension when you can
Gaps in pension savings history can leave you worse off in retirement. So if you can afford it, when you return to work, you may wish to think about paying extra contributions to make up periods of unpaid leave – to fill the gap.
If you are in a defined contributions pension, your retirement income will be dependent on the contributions you and your employer pays in. So it’s important that you try to avoid having too many gaps in your pension contribution history, something you may regret later on in life.
But do keep in mind that if you decide to take a full year off work – and stop making contributions to your workplace pension – you might find yourself needing to work longer to make-up the shortfall. That is assuming you remain fit and healthy enough to do so.
The table below illustrates the pension pot impact of what a woman with a gross basic salary of £25,000 paying an employer-matched 5% contribution, taking a full year of maternity leave and stopping her payments during unpaid leave. She would be left with a shortage of £1,299.99.
Tips to manage your retirement savings to and through maternity leave
- Find out whether your employer provides maternity pay higher than the SMP.
- Consider increasing your pension contributions before you go on maternity leave, particularly if your employer matches your contributions. Your employer has to continue matching your contributions during paid maternity leave.
- Avoid leaving the pension scheme as your employer will continue to make pension contributions based on your pre-maternity leave salary.
- You only need to make contributions based on your actual earnings during maternity leave, making them more affordable.
- When you return to work consider paying additional contributions to cover periods of unpaid leave and when your contributions were lower.
- Review your pension payments when you return to work, if you have another child, when your children reach school age and if you no longer need to pay nursery or school fees.
- Simply being in the workplace pension scheme doesn’t guarantee you enough money in your pension pot to get you a comfortable retirement. You need to make financial plans for the future so you can spend quality time with the family you have worked so hard to raise.
Kate Smith is head of pensions at Aegon