If you’re a mother, by the time your first child is 20, chances are that you’ll earn about 30% less an hour than a similarly-educated father. Even before they have children, women earn about 10% less than men. But that gap increases rapidly for many women after they have children.
Why? Forget ‘baby brain’ or lowering your sights after becoming a mother. This isn’t about hormones and it isn’t about ambition. The sad fact is that the practicalities of motherhood hamper women’s earning potential.
According to the Institute for Fiscal Studies (IFA) about a quarter of the wage gap is explained by the higher likelihood of mothers working part-time while their child is growing up. And about a further tenth of the pay gap is explained by mothers’ higher propensity to take time out of the workplace completely at some stage.
This motherhood pay gap has such an impact that a graduate who has worked full-time for seven years before having a child would, on average, see her hourly wage rise by a further 6% (over and above general wage inflation) as a result of continuing in full-time work for another year. But she would see none of that wage progression if she switched to part-time work instead.
And, as Robert Joyce, an associate director of the IFS, and one of the author’s of the report, explained: “It is now the highest-educated women whose wages are the furthest behind their male counterparts – and this is particularly related to the fact that they lose out so badly from working part-time.”
While the IFS is among those pushing for governments and others to address the reasons and work on narrowing the pay gap, the onus is on women to take steps to lessen the knock-on effects of the pay gap on their future finances.
Because, while working part-time is likely to have an immediate affect on the money you have in your pocket, it can also have an affect on your future finances. One likely by-product of working part-time is that you’re likely to fail to qualify for automatic enrolment into your company’s pension scheme. But that is only one of the future potential pitfalls that all women, and especially mothers, need to be aware of.
As Sam Smethers, chief executive of the Fawcett Society, a champion of women’s rights, said, the shift in priorities, experienced by so many women when they have a child, can seriously jeopardise their future financial security.
“Women take a big hit on their finances when they have children, both in the short and long term, as they often put the needs of their family before themselves.
“It is vital that women consider their own pension provision when they have children, rather than relying on a partner. Otherwise they risk poverty in retirement,” she added.
And then came baby…
One report1 shows how women’s otherwise strong focus on saving for their future, often tends to get forgotten once they have a child.
It found that, while nearly a third (30%) of women at 30 think they are likely to save more for retirement in the next 12 months than they do currently, by the time they reach the age of 35, when 56% of women have at least one child, other priorities take centre stage and that figure drops to just 12%.
With over half (52%) of babies born to mothers aged 30 and over, women at 30 are on the brink of a major shift in priorities. Four in 10 (40%) expect their financial priorities to change in the next 12 months because they plan to start a family.
With the pensions gender gap currently sitting at 40%, the fears of experiencing a shortfall in retirement is still a reality for many women.
Protect your state pension
If you take a career break after having a child and you’re not in employment, you won’t be paying national insurance. With the new state pension rules requiring you to have at least 10 years of national insurance payments to be eligible for any state pension, it’s easy to see how stopping work to bring up a family can seriously damage your future state pension entitlement.
However, there are ways to protect it. Make sure you register for child benefit. As long as you are registered for child benefit – even if you don’t receive it - you get Class 3 credits automatically. These ‘plug the gap’ that you would otherwise have in your national insurance record and will keep you on track to receive the state pension.
You can check whether there are any gaps in your national insurance record. You may also be able to fill in any gaps by making voluntary payments; your national insurance record will tell you how much this would cost you.
You should contact HM Revenue and Customs (HMRC) if you think your record is incorrect.
Take advantage of pension tax perks
Paying into a pension when you’re not currently working, or even when you have other financial demands can seem counter-intuitive, but it should be a top priority.
Even if you do qualify for the state pension, the measly sum you’ll get is unlikely to be enough to live off, so you have to take action to look after your own financial future.
You can save into a pension, even if you’re not working. If you don't pay tax, you can still pay into a personal pension scheme and benefit from basic rate tax relief (20%) on the first £2,880 a year you put in. Tax relief rules means that the government will then top up your contribution to £3,600.
Retirement planning doesn’t have to be about sacrifice. The tax breaks associated with pensions are so great that it doesn’t take much to start to build up a decent pension pot. And the thing to remember is that even small sums can grow into something substantial given time. So start small, but start now.
You can open a SIPP and drip-feed investments in from as little as £80 a month or start with a £1,000 lump sum. With a SIPP you choose where your money is invested, giving you control over your pension, including funds in our Select 50. You might also be able to transfer existing pensions you have into the SIPP, making it easier to see how your retirement savings are growing. Find out more about the tax benefits.
1 Data taken from the Scottish Widows Pensions Index and the Scottish Widows Average Savings Ratio. Research carried out online by YouGov amongst a sample of over 5,000 adults, including samples of 30-50 women aged 30.
The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. Eligibility to invest into a SIPP depends on personal circumstances and all tax rules may change. The value of tax savings will depend on your individual circumstances and all tax rules may change in the future. The Select 50 is not a recommendation to buy or sell a fund. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.