Starting a pension early pays off later Getty
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When people dream about retirement they imagine doing all the things they wanted to do but never had time for. Yet research shows that millions of women will not have enough money to maintain their current lifestyles, let alone follow their dreams, unless they start saving earlier.

Why is it so important for young women to save?

The UK’s pensions gap is twice the size of the gender pay gap. The Prospect trade union has reported that the gender pension gap in 2016-17 was 39.5 per cent, which equates to an approximate average shortfall of £7,000 — more than twice the level of the 18.4 per cent gender pay gap in 2017.

One of the reasons for the disparity in pension income says Alexandra Kitching, defined contributions and employee benefits manager at Deloitte, is that there are challenges for women that men may not necessarily face. “For some women a working profile may consist of a career break in their 30s to have children and again in their 50s, to provide elderly care to parents or other relatives. These breaks may come at a time when earnings are growing or indeed at the highest levels which may significantly impact retirement saving. As a result of these career breaks it takes women longer to save the same amount as men.”

How much should I save, even if retirement is not looming?

There are some easy steps women can take to boost their retirement savings. Analysis from Fidelity International in its report, ‘The Financial Power of Women’, reveals that women could close the gender pension gap by dedicating an additional 1 per cent of their salary towards their pension early in their careers. This is an average of just £35 per month in contributions over 39 years.

Emma-Lou Montgomery, associate director for Fidelity International says: “It’s crucial younger women, in particular, aren’t fooled into thinking that because their retirement years feel like a lifetime away there is nothing they need to do now to prepare for them. Even the smallest amounts set aside at the start of careers have the chance to grow into a substantial pot of money for retirement.”

Why are women not providing for their old age?

However, according to Fidelity, the majority of women tend to be apathetic about pensions. Barriers that stop women from investing include salary limitations, household costs and chores.

A lack of trust and understanding when it comes to the investment industry is another issue. Over one in ten women do not feel comfortable choosing financial products and services — twice as many as men. More women than men described the way investment is communicated as ‘complicated’, ‘incomprehensible’ and ‘intimidating’.

Claire Walsh, personal finance director at investment company Schroders, says women are less likely to join pensions or contribute as much as men as they want to fully understand a product before they will commit. “In theory this sounds positive,” Ms Walsh explains, “but as there can be a lot of information to comprehend with pensions, this can end up being a barrier and I suspect that many women decide that they’ll come back to it when they’ve got more time and then life gets in the way.”

How can compound interest help multiply your pension?

Start saving early enough and a pension becomes much more affordable. Regular contributions get women into the habit of saving and they can benefit from compound interest, explains Ms Walsh. That is the simple yet amazingly beneficial process where interest is added back to the principal sum and then interest is earned on that added interest. Those early payments you make when you are young will attract compound interest over time, and contribute most strongly towards the growth of the pot as a whole.

Ms Walsh gives the example of three hypothetical savers, Kate, 25, Jenny, 35, and Alex, 45, who are all thinking of starting saving to retire at 60. If Kate puts away £250 a month she will have a pot at retirement of £285,000 whereas Jenny will need to put away £500 per month to achieve a similar pot. And even if Alex stashes away £1,000 per month, her savings are unlikely to achieve as much as either Kate or Jenny’s.

The effect of compounding is even more important to take into consideration for women than men, because women tend to take career breaks when they start a family. “ The gender pay gap only widens after the age of 30 as this coincides with an increase in working part-time, so wherever possible women should prioritise pension saving while still in full-time employment,” explains Helen Morrissey, a pension expert at Royal London. “Over time the cumulative effect of the individual’s contributions alongside those from the employer, tax relief and investment performance can have a powerful effect on the amount built up.”

Where should young women invest for retirement?

Given that employers still contribute to the vast majority of schemes, workers are turning down free money if they do not join a workplace pension, says Emilie Bellet, founder of Vestpod, a financial website and events business aimed at young women.

“You will get tax relief on the money you contribute and your employer will also pay into it. If you don’t have one, you can contribute to a personal pension and receive tax relief on your contributions.”

It may all seem boring and impenetrable but a simple pension saving habit can make all the difference between a poverty-stricken retirement and ticking off those items on your bucket list.

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About this Special Report

We look at how today’s young women should prepare for the world of work. We explain the importance of making the most of alumni contacts, how to make a case without being interrupted by men, and why becoming a reverse-mentor can help younger employees move ahead early in their career

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