Women are still likely to be at a financial disadvantage to men at retirement despite the government's proposed reforms to the State pension and personal accounts, suggests research produced for Scottish Widows.
The government’s proposed move to reduce the minimum number of years people should pay National Insurance contributions from 44 to 30 years levels the playing-field in relation to the State pensions system, as women are currently more likely to give up or reduce their working life to raise children, and reducing the number of years contributions are needed would therefore allow space to do so without financial penalty to their State benefits.
However, according to case studies commissioned by the life insurer and produced by the Pensions Policy Institute, the likelihood is women will still receive a lower pension income at retirement because they are more likely to take a career break or go part-time to raise children, and are therefore less likely to continue paying the same level of pension premiums during the reduced working period.
The PPI says an employed man on median earnings who contributes continuously from age 22 until he retires at age 65 could receive £74 a week in ‘real’, or earnings-related, terms from a personal account at age 68.
The equivalent pension for a woman is just £51 a week - 69% of what the man receives – because women still tend to have lower average earnings, pay more expensive annuity rates because of higher longevity and are more likely than men to take career breaks, or work part-time, which further hits potential retirement income.
According to the study, men could also increase their pensions personal accounts by a third if they work an extra three years beyond the current retirement age, as a case study prepared by the PPI shows a man who starts saving into a personal account at the age of 22 could see it increase in value by 32% if he retires at 68 rather than the current statutory retirement age of 65 “through a combination of the extra contributions paid, investment growth and a better annuity rate at the higher age”.
Self-employed people, however, do not pay into the State second pension (S2P) and has no employer to contribute to their pensions, so a self-employed man on median earnings might receive only £46 a week from a personal account in real terms, even if he contributes at the same rate as an employed man continuously from age 22 until he retires at age 65.
Reforms to the means-testing system also mean even if he saved throughout this period, he will only be £12 a week better off at age 68 than if he had saved nothing at all, and only £2 a week by age 78 because changes to the savings credit mean that those who are not entitled to S2P will lose £1 of means-tested benefit for every £1 of personal income on a significant part of their pension.
That said, evidence also suggests few people would be willing to work those extra years, as 58% of the 750 people questioned say would be angry if they were forced by the government to work up beyond 65.
Additional evidence indicates a third of people (34%) questioned believe they cannot afford to save for retirement, suggesting a significant number of people could opt out of the personal accounts scheme once launched.
Similarly, research also indicates consumers believe it is possible to defer saving for retirement until age 28 without impacting on their ability to maintain a decent standard of living in retirement yet data suggests putting off saving for the six years between age 22 and age 28 could reduce income from personal accounts by 11% for a ‘median-earning’ man.
The case studies were designed to find out what those three extra years to retirement would mean financially for all UK retirees, however the research does suggest both women and the self-employed are still disadvantaged – and therefore need most encouragement to save for retirement – because they may not pay continuously into a personal account.
Ian Naismith, head of pensions market development, Scottish Widows says he is concerned despite the government’s move to level the financial situation of women and the self-employed, additional work may yet be needed to bring the balances closer together.
“The Government’s reforms mean that many women will get a much better deal from State pensions than at present, but despite the introduction of Personal Accounts they will continue to lose out on private provision.
The position of the self-employed is a particular concern. Not only do they lose out on State Second Pensions and employer contributions, but the changes to means-tested benefits work against them and mean that much of their incentive to save for retirement is lost.”
To worsen the situation, research conducted by Deloitte for Scottish Widows suggests less than a quarter of employers (23%) will continue to pay the same rate of contributions into their employees’ pension scheme once it is compulsory in 2012 for employers to pay into personal accounts.
More specifically, responses to the study suggest two-thirds of employers (65%) will retain current contributions for existing staff but they will reduce the employer contribution “more in line with the personal account minimum” of 3%, indicating workplace pension provision could reduce in value further compared with current arrangements.
Naismith adds: “There is widespread agreement that employers have a vital role to play in helping their staff provide for their retirement,” says Naismith.
“It is very worrying that companies who already have generous pension arrangements are likely to reduce their contributions once personal accounts are introduced, and the government needs to make it as easy and worthwhile as possible for them to retain their existing arrangements.”
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