Women and retirement – what are the issues?

Fiona Murphy looks at the financial strains affecting how women are preparing for retirement.

A woman's work is never done, as the old adage goes and it certainly seems to be the case in the UK right now. Friends Life's recent survey Working Women found 68% of women in their fifties expect to work throughout their 60s and beyond. So what is the reason for this? Many of these women are on the cusp of retirement, so are they making the finishing touches to their retirement strategies? Are they continuing to work through choice and what impact do these longer working patterns have on the financial choices they make?

Under pressure

For many, the decision to delay retirement does not come from choice, but financial necessity. Historically women have tended to save less, if they save anything at all. This has often been attributed to cultural reasons. Saga's director general Ros Altmann believes, many women who are now in their fifties would not have sufficiently planned for retirement as they would have often relied on a husband's pension rather than making their own provision. However, a third of women reach retirement single either via divorce or bereavement. They cannot rely on the safety-net of a partner's savings.

A second factor is that on average, women have always earned less than men for a number of reasons. Scottish Widow's last UK Pensions report (June 2011) identified a gender pay gap continuing among survey participants with men earning £33,000 and women earning £26,800 on average. This is more evident for the baby boomers that worked before sex discrimination laws were finalised. With lower earnings women's capacity to save has been reduced in relation to their male peers. As a result of lower wages, women's occupational pension pots tend to be smaller, if indeed they have had access or been willing to join a company scheme at all.

In addition, in the current state pension system, generally women have paid less National Insurance contributions than their male counterparts due to career breaks for childcare. As Altmann says of this generation: "Women interrupt to have children. They have never got into the habit of saving. Men don't expect to have that kind of interruption. So if there is an employer pension scheme, they'll join it, if not they'll set up their own personal pension scheme, whereas women tend not to."

Women also face different obligations compared with their counterparts a generation ago. Many are encountering the growing financial pressure of what Friends Life has dubbed the ‘family bailout'. Children are depending on their parents for longer than before. According to the research 93% of working mothers over 50 have supported their adult children (over the age of 21) financially in some way. This can include funding one-off expenses such as helping children get on the property ladder, planning a wedding or tuition fees. But due to high unemployment (particularly among those aged 18-25) many mothers are supporting the day-to-day needs of their offspring.

However, the picture remains similar for those with children in steady employment. 70% of women allow their children to reside in their family home due to soaring rental prices or the inability to afford a mortgage. In addition, there is the added pressure of caring for elderly parents which often defaults to women in this age band. And alongside the squeeze of home life, comes the great challenge for women and retirement planning - the changes to the state pension.

No easy solutions

The increase in the state pension age has brought many concerns for advisers and their clients around how to fund the extra years before women can draw their State Pension. Only a small proportion of women (14%) can now expect to retire at the age they originally intended leaving the rest to make some tough decisions about how to fund these extra years. While a great number of women expect to work through their sixties, those who financially prepared to retire at the current state pension age, would have to revisit their plans.

For those women who will have to wait until 65, there is an unforeseen penalty. The current basic state pension is £5,312 per year (before tax), which would mean a loss of around £26,560 over a five year period. That does not factor in the added costs of other pension arrangements and inflation. Overall, this creates a huge gap in the finances they expected in retirement. Addidi Wealth's managing director Anna Sofat said: "For those who have been planning, it's a real slap in the face. It's not easy to make up that shortfall. It's only women born at a particular time frame between 1953 and 1954 that take the real hit. I do feel it's something the government ought to revisit."

Many believe the proposed state pension increase for women from 60 to 65 by 2018 has come too quickly and only gives these women around seven years to prepare. Altmann agreed: "Anything less than ten years can't be described as fair. Ideally the longer the better. Within ten years of expected pension, you would have to be in the final stages of your plan."

Advisers have to adapt to the ever changing pension landscape. On the pension issue, women seeking financial advice are split into two camps dependant on their specific needs. Discussing how clients view the increase to the state pension age Sofat says: "Advice varies. For those who are better placed (in terms of pension savings), it won't matter as much. They'll take a view and scale back their income needs. For those on more modest means, they have no option but to continue to work."

So, the advice seems very simple, save more or work for longer. But what else are advisers saying? Turning to additional solutions outside of the pension, is something advisers are keen for their clients to explore. Altmann cites property as an additional source of income if necessary saying: "If you do have a house, consider downsizing."

While downsizing and equity release has often been a common retirement strategy, we may find more women turn to this option to bridge the gap in their income until they can retire at 65. As Almary Green's managing director Carl Lamb says, there needs to be an awareness that "not everything is going to come from a pension fund."

As ever, keeping clients informed about impending changes is crucial to their long-term retirement strategies. Although the government is changing the goalposts, women will "need to accept the fact it is also in their own hands" and adjust and plan accordingly. For instance any shortfall in earnings can be topped up by other investments until the time comes to draw on their state pension.

Future potential

However, one potential silver lining for women comes in the form of the proposed shift from a means tested system towards a flat rate pension expected to be £140 a week. It is said that woman will be the clear winners from this change, as currently the system penalises those who have gaps in contributions. This should remove some of the complexity and doubt that often puts people off putting their finances in order.

There are also positive signs that women in their fifties are beginning to actively address their retirement. Scottish Widows has done a lot of extensive research looking at pensions trends. Head of pensions market development, Ian Naismith, said this year women were catching up to men with their savings, for the first time. For the under 50s there was a ‘relatively little percentage difference in what women were saving compared to men.

While in absolute terms when saving for retirement, women are saving less in terms of the percentage they earn, it's pretty close now. In the next few years, we should see great changes to the way the women on the cusp of retirement manage their finances. From working longer, longevity, alternative investment strategies, to the erosion of the sandwich family model, there will be many interesting trends that will drastically change the retirement landscape for women in the UK.