Millions of parents are missing out on up to £720 a year in extra pension cash – are you affected?

Parents who take time off work to raise their children could be missing out on hundreds of pounds a year in extra pension cash because they’re not taking advantage of a little known rule.

Many parents have periods when they are out of the workforce – and so are no longer earning – when they have a family. Often they think this means they must pause their pension contributions.

But in the UK, even if you have no earnings, you can still pay up to £2,880 into a personal pension each year to give you more money in retirement.

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You also receive 20% government tax relief top-up, bringing the total annual contribution in your pension pot to £3,600 – an extra £720 of ‘free’ money to boost your pension.

If you are a non-earning parent and can’t afford to pay into your pension, there is a neat workaround; your working, earning spouse or partner can contribute to your pension on your behalf and you still get the £720 tax relief top up.

Ruth Handcock, CEO of Octopus Money, a financial advice firm, said: “I can’t shout about this policy enough. As a working parent who has experienced parental leave twice, I empathise with those families who want to celebrate the joy of having children without compromising on their financial security for later life.”

She added: “The earlier you know, the bigger the difference it can make. I strongly urge all new parents to think about financial planning in parallel with family planning – to futureproof the whole family, not just the newest member.”

‘I didn’t know this government pension rule existed’

Octopus Money research suggests millions of families are unaware of this little-known bonus that allows partners or relatives to pay into someone’s pension while they’re off work, with the government automatically adding a top-up to boost your pension even further.

Despite being established over 25 years ago under Tony Blair’s 2001 Finance Act, the majority of parents (63%) have never heard of this policy. Nearly two-thirds (65%) say they would have used the rule if they had known about it.

The findings come from a nationally representative survey of 1,000 parents, commissioned by Octopus Money.

Based on official Office for National Statistics (ONS) data, Octopus Money estimates UK families who missed the opportunity could have lost out on a total of £2.5 billion in pension top-ups while they took parental leave, if they were non-earning.

One mum who narrowly missed out is product manager Ekaterina, 33. She said she didn’t even know the rule existed until it was too late.

“I hadn’t really thought about how taking parental leave would affect my pension, not until quite late into my leave. Before maternity, my focus was on short-term things like setting up the nursery and budgeting for time off, not the long-term impact on my pension or future wealth,” she said.

Her employer gave her information on maternity benefits, as well as access to financial advice from Octopus Money, which helped her understand how even a short break can affect future contributions – though unfortunately she read the material too late to benefit from the pension rule this time around.

“I didn’t know this government pension rule existed and I think that’s the same for a lot of other parents. It’s a missed opportunity to keep long-term finances on track during a period when many of us are focused on day-to-day stability,” said Ekaterina.

She added: “My husband and I are quite open about money, and if we had known that this was an option, we would definitely have done it. It’s such a practical way to balance financial gaps that can otherwise quietly grow over time.”

Ekaterina and her husband have now moved from just focusing on short-term costs like childcare, to planning for long-term pensions, savings, and investments.

“Looking back, I wish I’d started investing earlier and paid closer attention to workplace pension policies,” she said.

Gender pension gap

The rule that allows a working partner to contribute to a non-earning spouse’s pension applies to men and women. But in reality it is women who are more likely to take time out of the workforce and need their pension boosted.

Career breaks – often due to caring responsibilities – are what help push one in three women into pension poverty, according to a Scottish Widows report this year, which found women face a gender pension gap of £113,000 compared to men.

The median total private pension savings for women at retirement is £173,000 versus £286,000 for men, according to Scottish Widows. This gives a gender pension gap of 32%.

A big reason for the difference is that women are 12 times more likely to take a break in their career to raise children (36% versus 3%), leading to loss of income and gaps in their pension contributions.

Greater uptake of the rule that allows the earning partner to pay into the non-earning partner’s pension could help plug the ‘pension gap’ between men and women.

Women are aware they are behind in pension saving and are worried. More than two fifths (42%) of women say they are not confident they will have enough in their pension to live comfortably in retirement, compared to just over a quarter of men (28%), according to research by Octopus Money.

Around a third (34%) of parents reduced or paused their contributions to their pension during their parental leave and one in six stopped their contributions altogether, the study found.

More than half (52%) of parents said becoming a parent hit their finances harder than expected. While many assume childcare costs are the main concern, parents say their biggest financial worry is saving for their children’s future (45%), followed by day-to-day living costs (42%).

Among 13,000 customers signed up with Octopus Money, the pension gap between men and women widens sharply with age.

Women in their early 20s start out slightly ahead, but by their mid-20s men have overtaken them. By age 55 to 60, men have around 40% more in their pension pots than women – illustrating that a pause in contributions when starting a family can snowball and have a real impact on your finances in later life.

Michelle Kennedy, chief executive of Peanut, an app connecting women through all stages of motherhood, said: “It is so important to understand what you can do, what you're entitled to, what everything means, how things work, your contributions. Should you be making the most of your contribution? You bet your life you should be.

“All of these things are so fundamental. If you are someone who likes to feel empowered in any other element of their life, please let it also be with your own personal finances.”