This Mother’s Day, forget the chocolates and champagne (not good for the diet), the flowers (unlikely to last long) and consider treating your mother to a makeover. Before you book the nearest spa, I should explain, I mean a financial makeover.
The gender pay gap has been dominating the headlines recently. Less talked of is the gender pension gap, which can have long lasting consequences for those women who have not planned their retirement. This affects older women to a greater extent and especially those who have taken time out of the workplace to be full time mothers.
Research conducted by Aegon*, the pension provider, showed that apart from the State pension, women have average pension savings of £24,869 compared to £73,568 for men. Some of this may be down to the gender pay gap, as pension savings tend to be linked to earnings. It also reflects that many women take time off work to raise a family and often return to part time or lower paid roles. This gap may reduce over time, due to the requirement for all employers to enrol staff earning more than £10,000 a year into a pension scheme. Yet mothers remain more likely than fathers to take time out of their career and in consequence enjoy a less secure retirement.
Being aware of this gap in pension savings is the first step to taking action to make up for lost time and to improve retirement income. Here are some of the ways in which a financial makeover can benefit future income prospects.
Everyone can pay into a pension and receive tax relief on the payments made, even though they may not be a taxpayer or earner. Up to £2,880 per tax year can be paid into a private pension and will automatically be increased to £3,600 with the benefit of tax relief. This is available up to age 75.
The self employed can pay in up to 100% of their taxable profits with a ceiling of £40,000 per annum.*1 This reduces the tax payable on profits and will qualify for at least 20% rate of relief. Higher rate taxpayers can claim the additional tax relief via self assessment tax returns. Pension payments on profits earned in the previous 3 years can also qualify for tax relief, providing that there is a pension plan in place during that time.
From April 2019 all employers will be required to automatically enrol their employees between the ages of 22 and the state retirement age, who earn more than £10,000 per year into a auto enrolment pension scheme. Employers have to pay in 2% of the employees band earnings *2, a tax free benefit. The employee pays 3%, on which tax relief is granted so a 5% investment costs a basic rate taxpayer 2.4%, with HMRC making up the difference in tax relief. No action is required to join the scheme by eligible employees. Those who wish to opt out can do so.
Many part time workers however may not qualify as eligible employees, if they earn less than £10,000. These employees can still join the scheme on a voluntary basis. The Government is considering lowering the eligibility criteria so that more part time workers can benefit.
Many employers offer pension schemes which pay much more than this minimum requirement and finding out about what is on offer and joining workplace schemes is usually a good thing to do. It is also usually possible to make one off payments in to a pension and get tax relief in respect of previous 3 years’ earnings, providing a plan is in place.
A forecast from the State pension scheme will show how much State pension the individual is due to receive, when it will be payable from and whether there is a need to pay top up contributions to increase the pension. 35 years National Insurance contributions are required to get the full basic state pension, a minimum of 11 years to get a reduced pension.
Credits are given for years during which the individual is:
Where Child Benefit has been waived, due to another adult in the household earning above £50,099, the mother will need to complete form CH2 to claim the credits.
Mothers who have worked prior to having a family may have pension benefits from previous employments. It is worth updating the records of these and maintaining contact with the scheme. From 2019 the Government is planning to launch a digital service to reunite pensions with their owners.
A financial makeover as a Mother’s Day gift may not appear as appealing as some of the alternatives, but its value could be greater.
* Readiness Report 2017 published by Aegon.
*1 This allowance applies to those with taxable income up to £150,000. It is reduced for those with taxable income between £150,000 and £210,000, with a minimum allowance of £10,000 for earnings in excess of this.
*2 Band earnings in 2018/19 are above £6,032 and up to £46,350, so on earnings of £25,000 the total auto enrolment investment would be £948.40, costing the employee £455.23.
Director of Public Policy, LEBC
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