Too Many Women in the U.K. Are Missing Out on a Great Bargain
(Bloomberg Opinion) -- If some coveted consumer item — the latest iPhone for example — was suddenly offered at a 90% discount, it would be easy to appreciate the bargain.
Spotting a good deal is a bit harder in the world of personal finance. When it comes to tools for building wealth, value propositions can be less obvious and payoffs might not be truly appreciated for many decades.
A case in point is the U.K. state pension, which is not considered generous by international standards but is nevertheless a valuable benefit for Brits. Pensions have recently gotten caught up in political debates over government spending, but there’s another big issue that hasn’t gotten enough attention: the gender disparity around the scheme.
Men are more likely to be receiving the maximum state pension; women are disproportionately missing out.
A report in The Sunday Times published in April and based on official government data indicated that 509,000 men were receiving the full state pension under the new system (it was simplified in 2016), but only 178,000 women were getting the same benefit.
One reason for this is that men were more likely to have worked for the full 35 years required to receive the maximum state pension. The requisite National Insurance contributions, which pay for the state pension, are usually deducted from their paychecks and require little further thought or effort.
Women, on the other hand, were more likely to have taken career breaks, often related to bringing up children. As a result, far fewer women received a full state pension when they retired.
The tragedy is that making good on those missing contributions is both easy and an incredible bargain — far better even than an iPhone at 90% off the list price.
Currently the maximum state pension is 179.60 pounds ($247.78) per week or 9,339 pounds ($12,884) a year. Today you can get it when you retire at 65. It is also structured to rise by at least the rate of inflation each year, and often by significantly more.
Typically it costs around 800 pounds to make up for a year’s missed contribution and you can go back six to 10 years to fill any gaps. In today’s money, that 800 pounds will buy you 267 pounds of annual pension (1/35th of the full 9,339 pound state pension). Put in those terms, it is not immediately obvious whether this represents good value or not.
A better way to think about it is: If it was possible to buy the full 35 years in this manner, it would cost roughly 28,000 pounds. This is a substantial sum, but, according to the pension provider Aegon, you would be acquiring a pension worth 336,500 pounds — or 12 times the cost.
Paying to make up for any missed contributions looks like a good bet.
However, sometimes NI contribution gaps can be filled at no cost. A parent of a child up to the age of 12 is entitled to receive free national insurance credits. The problem is that these credits are tied to claiming child benefit. Unlike the state pension, child benefit is means tested and, if either parent earns more the 60,000 pounds a year, the child benefit is effectively fully claimed back through the high-earning parent’s taxes, leaving them no better off.
As a consequence, many parents earning in excess of 60,000 pounds simply don’t claim the benefit in the first place, not realizing that they are also giving up the free NI credits worth 800 pounds a year. As counterintuitive as it might seem, it is still worth claiming child benefit, even if the entire sum is claimed back in tax, because it also gives you a free credit toward the state pension. Forgoing a valuable credit again disproportionately affects women because they tend to be the ones left with holes in their NI contribution histories due to child raising.
If neither parent needs the NI credit themselves, possibly because both are still working, it can also be passed on to a grandparent if they play a significant role in caring for the child. This is another way of helping older women close any gaps in their own NI histories.
Another useful planning feature is that it’s possible to delay claiming the state pension in return for a higher weekly payment. The weekly pension increases by 1% for every five weeks payment is delayed. This can be a useful tax saver for someone who intends to continue working beyond the state retirement age, it’s especially good for higher rate taxpayers, who might prefer to wait until they pay the basic rate of income tax in retirement before claiming the state pension.
There’s one more national insurance gem worth noting — this benefits self-employed women currently making only small profits. Even before the pandemic, self-employment and freelancing was a fast-growing area for women frustrated either by the rigidities of formal employment or unable to return to the workplace after bringing up children. According to the Association of Independent Professional and the Self-Employed, the number of freelancing mothers has increased by 79% since 2008. For women in general the increase has been 69%. In 2019 some 1.7 million women were self-employed in the U.K.
If profits are less than 9,568 pounds a year, those who are self-employed are liable to pay Class 2 NI contributions, which cost less than 160 pounds a year. That is an 80% saving on the typical Class 3 rate, which is already excellent value for money. If your profit is less than 6,515 pounds a year, you don’t have to make any NI payments at all, but it can still be beneficial to do so if you have gaps in your contribution history.
The pension system in the U.K. remains very much stacked against women, but there are at least some things that can be done to improve the situation. As with most things in life, you have to ask to get.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Stuart Trow is a credit strategist at the European Bank for Reconstruction & Development. He is also a pensions blogger, radio show host and member of numerous retirement, finance and audit committees.
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