Women and pensions: do not sabotage your future, take these steps
When it comes to pensions, women are not doing well at all. The picture is frightening: either women don't have a pension at all, or they have one but it's woefully underfunded, or they completely rely on a significant other to provide for...
Women and pensions - are they like water and oil?
When it comes to pensions, women are not doing well at all. In fact, the picture is frightening: either women don't have a pension at all, or they have one but it's woefully underfunded, or they completely rely on a significant other to provide for them once they retire.
Let me scare you with some women and pensions facts:
1. We know about the gender wage gap, but this gap widens into an income gulf when it comes to retirement.
In Ireland, women tend to earn about 14% less than men, for a variety of reasons: they take time out of the workplace to raise children, they ask for less money during negotiations and they hold fewer senior management and board positions. If a man and a woman retire on the same day, then she can expect, on average, to have less money coming in: 35% less.
2. Approximately one woman out of three expects to rely on her husband or partner to finance their retirement.
My jaw dropped to the floor when I read this. I really don't like pointing this out, but it's a painful reality that not all marriages last until death do them part. Moreover, when death does the parting, the survivor is very often the woman: according to the CSO, men can expect to live until 76.8 years while a woman has a life expectancy of 81.6 years. If women don't make provisions right now, they could be left to live out the rest of their life in a very difficult financial situation, whilst having to deal with a heartbreaking loss. This means that one third of Irish women are pursuing a very risky strategy.
3. Women simply do not know what type of pension they have or what it's worth, because they don't look up that information.
In a Friends First survey, 38% of women didn't know what kind of pension cover they had and didn't know how much they contributed, as it was automatically deducted from their salary.
Women and pensions: what is happening?
Now let's examine the top six reasons that women don't have pensions:
1. "I can't afford to fund today - never mind save for the future"
This is a very real issue. It's understandably very difficult to take money out of a budget that is already squeezed like a lemon, in order to put that money into the future. I get that, I really do. Still, I have two questions to ask.
First, when do you expect this to change? If you think you will always be struggling to make ends meet, and you will never be able to save in order to fund your pension, it means you are, in fact, relying on the state pension to live on in your retirement. Let's think about that.
At the moment, if you have made 520 social insurance contributions (that's ten years of payments), you would receive the maximum contributory pension of €230 per week. If you want to know how many contributions you've made, you can ask the Department of Social Protection to send you a letter with these details. I did this last year and it takes about one minute to carry out this task. Now let's say that you do qualify for the maximum pension, would that be enough to survive on? According to the Minimum Income Standard Calculator, it is - if you own your own home. If not, then you're likely to struggle to cover the absolute essentials of life.
The second question is, how much do you think you need to get started? The answer is that you can put a minimum of €300 per year into a personal pension. Of course, everything is relative and you might find this quite a sum to take from an already stretched budget, but this is a small amount of money to begin.
Yes, you can survive off the state pension; and it also costs little to get your pension going. However, I want to challenge the assumption that you will actually get the state pension the way it is, when you expect it. At the moment, one retires at 66, there are five employees for every pensioner and the country has an existing bill of €440 billion, which equals the future cost of providing the State and public sector pensions.
I wouldn't be putting all of my eggs in this basket: the retirement age may increase over the next decade, as people live longer and the demographics of the workforce change (by 2055, there will be two employees to one pensioner). What is more, the contributory pension may not necessarily keep up with inflation. The state pension is a wonderful asset to have, but don't expect it to be the same in every way when you're approaching your autumn years.
2. I'm self-employed and my business is my pension... and I'm willing to work until I drop
It's great to hear that you enjoy what you do and can see yourself doing so until the end of your days, but (hopefully!) that's a long time off. Again, you're making two assumptions that might seem rock solid now, but long term planning requires challenging the fundamentals.
First, you're assuming that you will always have your business and that you will always want to be working in it. Second, you're assuming that you will always be physically able to work in your business, irrespective of your age.
Let's just say that you choose to accept these two assumptions. If you don't have a pension, you're still missing out on the tax relief saving of up to 40% of your income. In other words, if you pay tax at 40% and you put €100 into your pension, it will only cost you €60: the remaining €40 is a tax rebate from the government.
At the very minimum, ensure that you opt in for voluntary social insurance contributions (and you will find out all that you need to do so here) to protect the contributory pension you can receive from the state. You will absolutely need this in later life to maintain a minimum standard of living.
3. I haven't got around to it
There is no point in crying over spilt milk, but take action now. You've read the statistics and why would you ignore, at your peril, your future financial security and that of your family? Put an hour in your diary in the coming week to sit down on your own, with a coffee, and work out a plan.
There are small steps you can take to get started including reading my step-by-step guide, reading this women and pensions case study, reading the Women and Pensions checklist, working out what you need to save on an annual basis and how you're going to do it, shopping around regarding fees and charges and organising some meetings with financial advisors with a view to understanding your options.
4. I don't know where to start
Again, this is totally understandable, but no longer holds weight. The government has recognized that the industry might indeed have a bit of a jargon problem, and that this jargon can be utterly boring (apparently!). There is a range of information supports now, including the Pensions Authority, the Citizens Information Bureau and the National Consumer Agency that articulate what to do in very simple terms. Make sure you also read my jargon-free step-by-step guide here on my blog: it's designed to give you a broad outline of what you need to do.
5. I'm a stay at home mom, so how could I have an employer's pension if I don't have an employer?
Before I answer this, let me highlight the extreme importance of applying for the Homemaker Scheme using this form so as to make it easier to qualify for the maximum contributory State pension.
This form is one page long and could be worth up to €250,000. Yes, you read that right.
How can that be? When thinking about pension options, you can buy an income for life. That is, you can pay now into a pension plan that will give you an income every year (this income is called an annuity). If you were to buy an annuity at the current State pension rate, it would cost you a quarter of a million euro. Alternatively, you can fill in this one-page form. Which one would you prefer?
Please take this tiny action to maximize your chances of getting the maximum amount. Now, on to your question. You're quite right that if you don't have an employer, then you can't have an employer's pension in your current workplace (aka your own home). However, you can get a personal pension called a PRSA (personal retirement savings account) and this isn't affiliated with any company, but is simply your self-funded personal pension.
6. Ah, sure, it will be grand
Maybe it will if you have extraordinary luck, but why take the chance? Stack the odds in your favour by taking action! Whatever your age now, I hope that you have optimum health, that you are full of vitality and hunger for growth. However, if you're in your early 70s or late 80s and find it difficult to make ends meet, what options do you have? Is this the right time to be looking for a job?
If you start saving early, it's going to cost you a fraction of the amount you will actually need at retirement. According to Aviva, to get the same amount on your retirement (70% of your salary), you can save €1700 per year at 20, but you would need to save €3900 at 40 and an incredible €21100 at 60.
Finally, every woman is a role model for others. By going after what you truly want, you empower others to follow in your footsteps. Show your daughters, nieces, colleagues, peers that you're willing to create your own financial freedom after employment and encourage them to do the same.