As a woman, a coach to women and a mother of two young daughters, the reality that the pandemic has disproportionately affected women’s finances is saddening. It felt as if we were making real breakthroughs around the gender pay gap and the gender pension gap before the pandemic began. During the last year however, these promising advancements have been severely impacted, and in some ways progress has gone backwards, which is incredibly frustrating.
A recent report cited that an average woman in her 60s can expect to have £100,000 less in her pension pot than her male counterpart. As well as the gender pay gap meaning she will earn less, other contributing factors include working part-time and taking time out of paid employment to care for family members. Viewed through a different lens, what this means is that young women would have to work nearly 40 years longer than men to build up the same retirement pot.
All because of the choices women face throughout their lives and the penalties those choices inflict on their finances.
When my girls were younger, I took an extended time out of work to care for them. At the time, I didn’t consider what the impact was of stopping paying into my pension. It simply wasn’t front of mind - I was a busy new mother - and no one had explained the consequences to me. Now, 10 years later, I’m playing a game of catch up, trying to repair some of the damage that I inflicted on my pension pot by neglecting it for several years.
My biggest hope for my daughters is that they are able to make life decisions without financial considerations being the primary deciding factor. Should they want to take extended time out of work on maternity leave, move to part time work or choose self-employment, I want them to be able to do that. So I have taken an action on their behalf which I hope know will give them some peace of mind in later life.
I’ve recently set them both up with a Junior SIPP. I’m going to make sure that my daughters have that missing ‘gap’ of £100,000 towards their retirement savings by seeding their ‘gender pensions equality’ pot now.
Time to grow
£100,000 is a lot of money. But when it comes to the maths, building a pot that size inside a pension can be done relatively easily when started early enough, with the help of the power of compound interest.
Compound interest is the magic ingredient when it comes to growing pension savings. Interest or dividends get paid into your pension plan and then reinvested again. This means the longer you leave money to grow, the more compound interest builds, like a snowball, and the larger your pot could become.
When it comes to growing a pot of money, the ultimate size of the pot is impacted by:
The return you get on the money after fees
How long you leave it for, without withdrawing
How much and how frequently you contribute
When it comes to return, there are no guarantees where investing in the stock market is involved, as historic performance is never an indicator of future performance. However, where we assume 7% annual compound growth, compounded monthly, we can broadly expect our money to double every 10 years. Using this rule of thumb, this is what investment growth looks like over time:
|Year 0||Original investment|
|Year 10||2 times original investment|
|Year 20||4 times original investment|
|Year 30||8 times original investment|
|Year 40||16 times original investment|
|Year 50||32 times original investment|
|Year 60||64 times original investment|
You can see that having time on your side is a very powerful tool when it comes to generating growth.
With children, we have the benefit of a lot of time on our side. My girls are both under 10 years old. Under current pension rules, they wouldn’t be able to access the money in their SIPP until they are 55. The minimum retirement age is set to increase to 57 in 2028 and who knows what changes to pension rules will come into effect in the next 50 years.
Undoubtedly, it is likely that they may have to wait until they are in their 60s to draw down their SIPP. What this means is that they have at least 50 years for the money to grow if it is locked away inside a pension wrapper where it can’t be accessed.
This in itself is good news. I don’t actually need to contribute a huge amount of money now for it to grow to a sizable sum over 50 years. The power of time works its magic on even small sums.
How much money is needed to create a pot of £100,000?
To aim for a pot of £100,000 in 50 years time (1), I reverse engineered the numbers to work out how much I’d need to contribute now.
The answer is pretty surprising - you only need to invest around £3,400 (2).
Even if you were to make that as a one off investment and not contribute a single penny more, that initial investment could snowball into £100,000 over the 50 year time frame we’re looking at. Even more exciting, imagine that the girls themselves build a nice healthy pot of retirement savings or alternative income sources which mean that they don’t need to access that money in their pension until their late 60s. In that short 10 years, it could double again to over £200,000.
Tax relief and Junior SIPPs
One of the great things about investing in a pension is that you receive free money from the government in the form of tax relief. This means that the money that you can contribute personally is topped up by the government, resulting in a bigger pot.
With a Junior SIPP, the maximum you can invest is £2,880 per year. This will attract 20% tax relief, meaning that a total of £3,600 is invested into the pension. So that £3,400 to seed my ‘gender pension equality pot’ for my girls could be made up of £2,720 in personal contributions and £680 in tax relief. The maths gets even better; you only need to contribute £2,720 personally towards the £100,000 goal!
We’re in the fortunate position of having saved more money during the last year as a result of lockdown and a change in our spending habits. I used these savings to set my girls up with a Junior SIPP each, with an initial investment of £1,000. My intention is to add an additional £1,700 in the next couple of months. It’s money that we would have spent on a holiday this year, but which they can hopefully holiday on in style in their 60s.
At the moment I don’t intend to put any further contributions into their pensions. It’s a set and forget exercise, and I will probably just check on the balance every year or so.
We already put money away monthly to save for their university fees, and we would like to be able to contribute towards a deposit for their first home. In the knowledge that our money doesn’t have the same amount of time to grow to achieve these goals because they are not that far away, we don’t think it’s sensible to divert any more money into a Junior SIPP at the expense of these goals. Nevertheless, I am safe in the knowledge that their ‘gender pension equality’ pot is growing away in the background and I’ve taken action to prevent them being victim to the gender pension gap.
(1) Assuming 7% compound growth
(2) If you want to work this out for another amount, in the absence of a good knowledge of Excel, you can use the rule of thumb above as a broad guide
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Emma Maslin is a certified Financial Coach and Mentor, Financial Wellness Speaker and Founder of multi award-winning personal finance education website The Money Whisperer. A former Chartered Accountant, Emma believes financial health and wellbeing isn’t a luxury just for the wealthy; it’s a basic need for all of us.