Do you know how much working part time or taking a career break for childcare could affect your pension? We teamed up with the experts to look into the issue.
Every year working parents take the decision to work part time or take a career break to look after their children.
In doing that they know that they will earn less, but they probably don’t know how much it could affect their pension. We worked with pension experts in the Pension Policy Institute to look into this issue and we found that this pension penalty could be substantial.
The penalty is most likely to affect women, since they are more likely to take time out of the workplace to provide care for children or elderly relatives.
For example, we found that an average-earning woman working part-time in her 20s or early 30s might forego between £500 to £1,000 of pension contributions every year, while our modelling shows that working part-time for 10 years could reduce a median-earning woman’s final pension pot by about £15,000.
This exacerbates the gender pension gap that exists due to women being relatively lower paid.
‘New Parent’ cash injection
That’s why we’re calling for new mums to receive a £2,000 ‘New Parent’ cash injection into their workplace pension which, with investment growth and compounded returns, would offset some of the loss in pension savings that would occur from working part-time hours when children are in pre-school.
Given that fathers are increasingly taking time off or working part-time to care for their children, we’re proposing that the household should be able to choose whether the contribution is instead made to another parent or guardian.
While the ‘New Parent’ contribution will go some way to address the gender pension gap, we believe that further reform to the workplace pension scheme is needed to ensure savers have an adequate income in retirement.
Therefore, we are also recommending the government raise the minimum pension contribution for everybody from eight per cent to at least 12 per cent to boost savings for middle-income earners.
The average earner saving 12 per cent towards retirement could boost their pension pot by £50,000.
Have you been affected by the pension penalty? What do you think about our proposals?