The gender pension gap, which sees women retiring with less money than men, is rooted in a number of different issues. One of the main driving forces behind this, though, is the motherhood pension penalty.
Automatic-enrolment into workplace pension schemes has been hugely effective in encouraging people to save for later life. Nevertheless, mothers who take time off work or move to part-time hours are still at a disadvantage when it comes to saving for retirement. At Which?, we believe the government needs to take action to address this inequality.
In Top up the pots: Achieving adequate retirement incomes with automatic-enrolment, published in June 2019, Which? found that the average earning mother who moves to part-time hours after having a child could miss out on between £500 and £1,000 in pension contributions every year. Over the course of a career, this works out as a £15,000 deficit at retirement when compared to their full-time counterparts.
National insurance credits can ensure that taking time out to care need not lead to a loss in state pension entitlements, but no such equivalent exists for workplace pensions.
Therefore, to help tackle the motherhood pension penalty, Which? is suggesting a radical solution: a £2,000 pension top-up from the government for new parents.
This lump sum would be paid into the nominated workplace pension scheme of a mother on the birth of her first child, but households would also be given the choice to switch the contribution to another parent or primary carer.
When invested over a career, this pension top-up would go some way to addressing the gender pension gap, caused in part by working part-time when caring for young children.
Working reduced hours is a necessity for many parents, and should not come with the risk of financial hardship once they reach retirement. In 2019, no woman should have to choose between having a career or becoming a parent, nor should they face a penalty for deciding to do both.
While this is by no means the only reform that needs to take place to ensure savers have an adequate income in retirement, a pension top-up for new mothers could be a vital part of the solution to address the gender imbalance in pension savings.
Gareth Shaw is head of money at Which?