Gender pension gap – the cost of maternity leave and career breaks

Laura Suter
25 February 2019

•    Two years of maternity leave cuts your pension pot by £25,500 
•    A five-year career break and returning part-time could cost you more than £100,000 in pension money

Women are missing out on £25,500 in their pension pots when they take two years off for maternity leave, while those who take a career break and return to work part-time could see £100,000 wiped off their pension pot when they come to retire.

How much maternity leave costs your pension pot?

A woman earning the average UK salary with 5% pension contribution from their employer and 5% from the employee would have £368,580 at age 65, assuming 4% a year investment growth after charges.

You take two year-long breaks: If you took a year-long career break at age 30 and another year-long break at age 33, with no pension contributions in that time, the pot would be £25,493 lower. If the employer maintained their contribution during that time, at 5% of pre-maternity salary, the woman only misses out on £13,905 of pension pot.

You take one five-year long break: If a woman takes a five-year career break at age 30, with no pension contributions in that time, and then returned to work on the average salary for their age, their pension pot would be £62,483 lower than with no career break. Clearly they wouldn’t have an employer during this time, but if they maintained their own pension contributions from when they were employed, they’d have £28,401 less than with no career break – or £34,082 more than if they made no contributions at all.

You take two year-long career breaks and return to work part-time: A woman takes a year-long career break at age 30 and another year-long break at age 33, and then returns to work part-time, working three days a week until the age of 38 (so when the youngest child reached school age). We assume the same 5% contribution from employee and employer, but on the lower pro-rated salary, and in this scenario her pension pot would be £46,857 lower. 

You take one five-year long break and return to work part-time: If the same woman took a five-year career break at age 30, with no pension contributions in that time, and then returned to work part-time, working four days a week for the rest of her working life, on the average salary for their age (pro-rata), she would miss out on £100,845 of pension pot than if she took no career breaks and worked full time. 

Laura Suter, personal finance analyst at investment platform AJ Bell, comments 

“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.

“Women already face the prospect of a lower salary across their career, thanks to the gender pay gap, and they are clobbered again thanks to gaps in paying in while they take career breaks to have children. This is particularly important as women tend to live longer than men, meaning they need to eke out their pension pots to make them last for longer.

“With maternity pay often so low cancelling your pension contributions can seem like an easy way to save some cash at an expensive time of life. But just taking two year-long breaks in your pension contributions can leave you almost £25,500 worse off when you come to retire. 

“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. 

“Another option for those going on maternity leave is to get your partner to pay to maintain your full contributions throughout your leave. If you don’t have the spare cash to keep contributing to your pension while on maternity leave, you could opt to ramp up the amount you put in when you return to work, to help make up some of the shortfall.

“Anyone who returns to work part-time should also think about the impact this is going to have on their pension pot. If you return to work four days a week, and so are earning 20% less, but maintain your pension contributions at the same percentage rate, you’ll see a 20% drop in the amount you put into your pension each month. On top of this, any employer matching offered will also be a smaller contribution. 

“Someone who takes a career break and then returns to work part-time and maintains their pension at the same percentage contribution will miss out on more than £100,000 of pension money. Instead, you could choose to increase the percentage you put into your pension, so that you’re contributing that same amount in pounds and pence as when you worked full time. Even if you’re not earning money you’re still allowed to put up to £2,880 into a pension each year, which will be topped up with another £720 from the Government.

“The figures highlight the value of employers continuing to pay into women’s pensions when they are on maternity leave. Some employers may choose to maintain pension contributions as part of their maternity package, which provides a big boost to women’s pension pots over the long term. Even if they don’t do this, providing clear and useful information to women on the impact of stopping their pension contributions when they go on maternity leave would certainly help some understand all the facts before they make a life-changing decision.”

Laura Suter
Personal Finance Analyst
Laura Suter is personal finance analyst at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management, and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.
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