Flexibility in retirement doesn’t necessarily benefit women, who already suffer from smaller pension pots
Women face additional complexities when it comes to saving enough for their retirement. The gender pay gap puts them on an uneven playing field, as a smaller income compared with that of men means they may struggle to save enough for their later years. Time out of work to raise a family or to act as carers for elderly relatives exacerbates the problem. The result is often a smaller pension pot which, because women on average live longer than men, has to stretch further in retirement.
Prior to the pension freedoms, the inequalities women faced in retirement were gradually being rectified, including the equalisation of annuities and insurance rates, as well as plans to align state pension ages. But subtle inequality persists for women approaching and in retirement.
What options are now available to women?
The biggest of the new freedoms was to make ‘drawdown’ available to all – this had previously only been accessible to wealthier investors, Until the changes were introduced, most people used their pension fund to buy an annuity, which brought a guaranteed income in retirement.
Drawdown is a term to describe taking money directly from a pension (typically a defined contribution pension, such as a personal or workplace pension) with no limit on withdrawals. The investor can choose to move all or some of their pension into drawdown once they have reached age 55.
Of the fund, 25% can be taken as a tax-free lump sum. The remaining 75% continues to be invested and can be drawn down in any amount, at any time. Any money drawn out beyond the 25% tax-free lump sum is liable to income tax.
There are additional options for creating an income in retirement. As an alternative to drawdown, individuals can extract a lump sum of money from their un-accessed defined contribution pension, without moving into pension drawdown. Of the amount withdrawn, 25% will not be subject to tax, while the remainder will be subject to income tax. It’s also possible to withdraw a defined contribution pension in one go, and while 25% is tax-free, the remainder is treated as income, and might push people into a higher tax bracket as a result.
What is the gender drawdown gap?
The pension changes of 2015 provided equal opportunities in some important ways, making drawdown accessible to those with smaller pension pots and allowing women to access their pots at the same age and in the same amounts as men. But having a smaller pot than men, on average, and living longer, remains challenging for women in creating a sustainable income in retirement.
The equalisation changes to state pension ages also has meant that many women have to wait longer for that additional income to become available, further increasing the pressures they face. Other factors that could influence women’s ability to rely on their pension income in retirement include the fact that women are more likely to work part time (62% of women aged 52 to 69 are likely to work part time, compared with 24% of men) and are more likely to be a carer (25% of older women are likely to be a carer, compared with 12% of men).3
Women thinking about utilising drawdown in retirement are likely to face further challenges, as they are less likely than men to have investment experience,1 or even to see themselves as investors.2 This is crucial, as relying on drawdown as a principal source of retirement income without due consideration of risk capacity or risk tolerance can potentially lead to women draining their pot too quickly, or even not drawing enough for fear of running out of money.
All of this adds up to what we call the ‘gender drawdown gap’, which manifests itself in a lack of opportunity to draw enough money in retirement comparable to men, and often a lack of choice about how long women might want to work for.
What advice is available to women?
The first step to tackling the gender drawdown gap is awareness of the obstacles. Pension drawdown can provide great flexibility, but it also involves making many decisions to ensure that you’re investing appropriately, to avoid running out of money in older age.
It’s vital to take financial advice, which can provide you with confidence in your decisions and investment choices, and help you understand any potential consequences.
Planning for retirement is about more than simply making appropriate product choices and knowing how much to draw down each year. A regulated financial advisor is there to understand your goals and challenges and then put in place realistic solutions that are tailored to your circumstances to help get you there.
1 Zurich UK, Drawdown? Is it working for consumers, 2018
2 The Wisdom Council survey of 2,250 UK women, Yes She Can, November 2019
3 ONS, Living longer: caring in later working life, 2019
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