The 1% pension rule: can it help close the pensions gap?

If you're off track with your retirement savings goals, then  could the the 1% pension rule could help you fill the gap?

The widening gender pensions gap is mostly hitting women’s retirement pots who are more likely to take career breaks to care for children or elderly relatives and this affects how much they can save for retirement.

Aside from changing societal expectations, research by Fidelity International suggests that by increasing their workplace pension contributions by as little as 1%, women could gain up to an extra £37,000 in retirement even if they take a career break.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

PENSION CONSEQUENCES OF A CAREER BREAK

Women already face retiring with a smaller pension pot than male counterparts - even without a career break.

Based on the Office for National Statistics' average earnings figures and adjusting for inflation and investment growth, the average pot at retirement for a woman paying in the minimum 8% into their workplace pension over 40 years without a career break is £306,377 compared with £453,616 for men, according to Fidelity.

This gap is widened if women choose or need to take career breaks to raise children or care for older relatives.

Analysis by Fidelity International shows that a woman aged 31– the average age to start a family – putting 8% into their workplace pension, could see their pension pot fall by more than £25,000 if they take a two-year career break to care for their children.

 "Time taken off work can mean time when you’re not saving into your pension - meaning less money in retirement," says Emma-Lou Montgomery, associate director at Fidelity Personal Investing.

"Increasing pension contributions can also prove difficult alongside everyday household and family costs. But this is exactly why it’s so important to start saving into a pension as early as possible." 

There are ways to make the shortfall though.

THE POWER OF 1%

It is always good to contribute more to your pension if you can as it will hopefully boost your retirement fund in the future.

Upping your contributions can be tricky though with bills remaining high amid the cost of living crisis and you may have other expenses or savings goals.

However, by dedicating an additional 1% of salary towards a pension from the age of 25, Fidelity suggests, women could more than make up the £25,000 shortfall before taking a career break

A woman who increases her pension contributions by 1% from the age of 25 and takes a two-year career break at the age of 31 could see her pension pot rise to £316,340, Fidelity said.

That is almost £10,000 more than a woman paying in the minimum 8% without a career break, and £35,000 more than a woman who takes a two-year career break and continues to pay the average 8% in pension contributions.

This assumes investment growth of 4.25% after costs.

The typical shortfall can also be narrowed by taking a shorter career break if possible.

Should a 31-year-old woman choose to take a one-year break instead of two, they could see their pension pot rise to £330,317 by increasing their contributions by 1%.

That is £23,000 more than a woman who contributes the 8% without a career break and £36,000 more than had they taken a one-year break without increasing their pension contributions.

If the career break is reduced to six months, the final retirement pot could grow to £337,420 by contributing 1% more.

That would be £31,000 more than a woman paying in the minimum 8% without a career break and £37,000 greater than if they had a six-month break without increasing their contributions.

The calculations also work if you need to take a career break later in life to care for older relatives.

Applying the same methodology, the average retirement pot could increase to up to £335,305 for a woman who pays an extra 1% to her workplace pension from the age of 25 and decides to take a six month break later in life.

This is over £28,000 more than a woman without any career breaks contributing 8% and over £36,000 more than a woman paying in the minimum 8% with a six-month break.