There is a glaring gender gap when it comes to pension savings – a gap which grows as women age and means many face the prospect of spending their so-called “third life” in poverty.
There are many factors behind this gap, ranging from the fact that women still pay a higher “parenthood penalty”, to the gender pay gap, and even the way retirement products are designed.
While the number of men reaching the oldest ages is increasing, women still outlive their male counterparts.
And here’s the rub: if women live for longer than men, logic dictates that we should have larger pension pots to ensure our income in retirement lasts for as long as we do. But this couldn’t be further from the truth.
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In fact, as the Cridland Report into the state pension age points out, women are projected to have around a 25 per cent lower income on average than men in their first year of retirement.
While huge strides have been made in improving gender equality, women are still the ones taking a career break or opting for a more flexible working arrangement to raise a family or take care of a relative. This has an inevitable impact on our earnings and what goes into our pension pot.
But let’s say you never have children and you never need to take care of someone ill or elderly. In fact, let’s say your life journey is such that you work full-time throughout most of your career and earn well. Guess what? You’ll still end up with a lower pension than a man following a similar working life, thanks to the gender pay gap.
According to research from the Pensions Policy Institute, this means a high earning woman can expect a similar pensions outcome to that of a man earning the median wage.
The research also points out that, as 76 per cent of women over the age of 60 are either single, widowed or divorced when they die, the ability of women to accumulate a pension for their later life income is crucial to their wellbeing.
Part of the problem is the way pensions are designed. Company pensions are a great way of saving for retirement, but women still earn less on average than men. This means we end up putting less into our pension pots and get less from our employers.
This is further compounded by working part-time or taking career breaks. So while the gender pay gap is a long running concern, its knock-on effect on our pension savings means the gender pension gap is almost twice as big.
Research from consultancy firm Mercer backs this up, estimating that in the EU the difference between women and men’s pension savings stands at 40 per cent compared to a gender pay gap of 16 per cent.
Mind the gap
So now I have explained what the problem is, what can women do to close the gap?
Ultimately it calls for a fundamental rethink about how we manage our income in retirement.
Many women prefer the simplicity of an annuity – I hand my pension pot over to a life insurance company and in turn they provide me with a guaranteed income for life.
But remember, we’re living longer and this means our retirement income needs to last as long as we do, and keep abreast of the rising cost of living. Yes, you can build in inflation protection with an annuity, but this will mean a marked drop in the amount of income you get.
In fact, based on current annuity rates, a £1m pension pot will buy a woman aged 60 a single life annuity paying an annual income of around £42,000. Link that annuity to inflation, and the annual income drops to around £21,068. If we assume inflation runs at three per cent, it will take you around 24 years before you make up the income you sacrificed for inflation protection.
So while an annuity might be one of the few retirement products offering an income for life, it requires you to make a number of challenging assumptions about the future. And once you’ve bought your annuity, it’s yours for life. You can’t change it or sell it, even if your circumstances change.
This is where income drawdown really comes into its own. It is a far more flexible way of managing your retirement income over the long term.
Granted, it’s more risky since your pension pot will be exposed to the vagaries of the stock market. But over the long term, equities do tend to outperform all other investments.
With an income drawdown arrangement, you can vary the amount of income you take and when you take it, and also build in a degree of inflation protection by choosing the right investments, without necessarily having to sacrifice income.
If this sounds like hard work, it doesn’t have to be. Think of yourself as a farmer and your pension pot as a fruit tree. Every year, you want to pick income from your tree without damaging the capital pot, that is your pension. But you also want the harvest to grow each year – not because you’re greedy but because the cost of living is rising.
This means that capital growth is of equal importance, as the bigger your tree grows, the more fruit you can pick from it.
Look for investments which offer both income and sustainable capital growth, such as global equity income funds where managers can cherry-pick (pun intended) the best investments from across the globe.
Crystal ball gazing
For many people, an annuity may still be the most appropriate choice in retirement, not least because it is sensible to have some form of guaranteed income to cover your essential expenses. However, the problem with relying only on an annuity is that it requires a large degree of crystal ball gazing.
And we all know that predicting the future is very difficult, for men and women alike.
The only one thing you can predict with a fair amount of certainty is that you will probably live longer than you think – and that means that you need a flexible approach when it comes to retirement, regardless of your gender.