Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it”. Whether the above quote can be attributed to Einstein is questionable, but there can be no disputing the power of compound interest.
The June 2022 Office of National Statistics, Consumer Prices Index (CPI) figures show that inflation hit a new 40-year high of by 9.4% in the 12 months to June 2022. Indications suggest it could reach 12% in October 2022. If we could predict the future, we would all be billionaires. That said, inflation is here to stay for the short term at least.
I am interested in household budgets, and especially the plight of young families. For many of them, inflation has been brutal, reducing the little disposal income available and driving up debt.
The squeeze on household budgets has a profound impact upon women who are often in lower paid, part-time work, and caring for young children. The lower income and gender pay gap translates to the gender pension gap. Women who attended university in 2006/2007 take, on average, five years longer to pay back student debt. As they take longer to pay off student debt, less money is paid into pensions. The latest research from the Pensions Policy Institute (PPI) envisages that women need to work, on average, an additional eighteen years, full-time, to save equal amounts of money into their pensions as men.
The Gender Pension Gap (Source: Aviva March 2022)
The pension auto enrolment threshold for employers is £10,000 per annum. Women traditionally work in lower paid jobs, so they may be missing out on valuable employer contributions. They need to actively seek enrolment in occupational pension schemes if they are not to miss out on valuable contributions.
The gender pay gap is 15.5%. This creates a situation where, on average, women are putting in less to pension savings, the gender pay gap for older women is greater; for women 40 to 49 it is 21.3% and for those aged 50 to 59 it is at its highest at 21.4%.
The Gender Pay Gap
To qualify for the maximum State Pension, a person must have thirty-five years of National Insurance (NI) contributions. Years out of the workplace impact upon the level contributions women make and reduce the level of State Pension available. HMRC no longer send reminders about NI contributions and the missing years. For divorcing couples, it is essential they check their NI record and make up any shortfall if it is advantageous to them. This requires research as it will not be worth it in every case.
When household budgets are squeezed, then savings are reduced along with pension contributions. Many are tempted to stop contributing to a pension altogether. For women, this can have a detrimental impact on their retirement plans and means they must work well beyond the State retirement age.
For divorcing couples, achieving the maximum State Pension available is a necessity. Where one party has not worked, often the woman, the maximum State Pension is a valuable source of guaranteed income in retirement that must not be overlooked. Form BR19 should be used if a client cannot obtain an online State Pension forecast.
Check the full NI record to see whether qualifying years can be made up and if it is worth paying the additional sums involved. This can be done online through the Government Gateway https://www.gov.uk/check-national-insurance-record
There is no substitute for taking advice from a qualified Independent Financial Advisor, to ensure that proper provision is made for retirement. When looking at budgets on divorce, do factor in warning clients against reducing or stopping payments into pensions. It may have a significant impact upon future retirement plans. This is especially so in the case of women who have been out of the workforce. After all, we want one of the most powerful forces in the universe working in our clients’ favour.