Going part-time could leave a £58,000 hole in your pension: how to plug the gap

Many people cut down their days or hours at some stage in their career – often to juggle childcare responsibilities, look after their health, or enjoy a more balanced lifestyle. But it is important to consider the impact on your pension too. Without careful planning, going part-time could result in a partially-funded retirement.

New research from financial services company Standard Life reveals switching from full-time to three days a week could lead to £58,000 less in your retirement pot, once inflation is factored in.

Women are more likely to feel the pain, with childcare responsibilities still falling disproportionately on their shoulders. Often, the gender pension gap then widens for a second time in later life as a result of the “good daughter penalty”, with many taking on caring responsibilities for elderly parents too.

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Those who have to reduce their hours as a result of ill-health could suffer too, as well as those who simply want to introduce greater balance into their lives. Many ease into retirement with part-time work, for example, but it is important to assess the financial viability of this before taking the plunge.

Lots of savers miscalculate how much you actually need for a comfortable retirement. It is £59,000 per year for a couple, according to the latest figures from the Pensions and Lifetime Savings Association (PLSA), and that doesn’t include housing costs like a mortgage or rent.

Others hit their sixties and decide they want their golden years to start, but without ample planning, they may find themselves having to “unretire” after depleting their pension pot too early. This can be financially disadvantageous, as the tax perks on pension contributions are typically reduced once you start accessing your pot.

Impact of going part-time

According to Standard Life, if you enter the workplace aged 22 with a £25,000 salary and pay the minimum pension contributions under auto-enrolment rules, you could amass a total pension pot of £210,000 by age 68. These calculations allow for 2% inflation, 3.5% annual salary growth and 5% investment growth on the assets in your pension.

Switching to three days a week from age 35 would reduce the pot to £152,000 – a significant hit. This is £58,000 less than if you remained working full-time.

We plugged these figures into a couple of free annuity calculators to see how much income you could get from a pension pot this size, assuming you were around 68 years old.

Trading in a £210,000 pension pot would allow you to take a tax-free lump sum of £52,500, and a yearly annuity income of around £10,829, according to Aviva. Meanwhile, from a £152,000 pot, you would only be able to take a £38,000 tax-free lump sum, and your yearly annuity income would be reduced to around £7,831. Legal & General’s annuity calculator also gave us similar results.

This reduction in retirement income could prove particularly challenging for households who expect to have significant outgoings in old age. House prices have increased enormously in some areas in recent decades, for example, forcing some buyers to take out ultra-long mortgages. The monthly repayments on these loans are more affordable, but you pay more in interest over the long term and run the risk of still paying a mortgage in retirement.

Meanwhile, those who cannot afford a property or who choose not to buy will have to find the money for rent. Research published earlier this year suggests as many as 3.6 million households could be renting in retirement by 2041, with the average renter needing £400,000 more in retirement savings, according to analysis from Standard Life.

These costs aren’t accounted for in the retirement cost estimates provided annually by the PLSA, which already suggest a couple would need £22,400 a year for a basic retirement, £43,100 for a moderate retirement, and £59,000 for a comfortable retirement.

Increasing your pension contributions could plug the gap

“It won’t always be possible, but if you can, increasing your pension contributions when you make the move to part-time work could go some way towards [filling] or completely fill the gap,” says Dean Butler, managing director for retail direct at Standard Life.

It will mean sacrificing some current income at a time when living costs are high, but the tax perks associated with pensions – plus the investment growth you could achieve over the long term – should make the decision worthwhile.

Using the same example as previously, upping your pension contributions to 13% (10% employee contributions and 3% employer contributions) could almost eliminate the £58,000 gap. The total pension pot in this scenario would be £206,000, just £4,000 lower than if you had continued to work full-time.

Impact of going part-time aged 35

^{Source: Standard Life. Based on a starting salary of £25,000 aged 22, before switching to part-time aged 35. Calculations allow for 2% inflation, 3.5% annual salary growth and 5% investment growth on the assets in your pension.}

“Even a small increase can make a difference over time and the power of compound interest means the earlier and more you save, the more your money will grow,” says Becky O’Connor, director of public affairs at pension provider PensionBee.

She recommends regularly reviewing your finances to see if you can gradually increase your contributions over time, particularly after a pay rise or reduction in other expenses.