SELF-EMPLOYED & PENSIONS REPORT
UK self-employed women face a bleak retirement: low pensions due to pay gap, worsened by divorce
Self-employed women in the UK are facing a financial time bomb in retirement, with a significant number lacking adequate pension provision amidst a persistent gender pay gap. Recent statistics paint a worrying picture, especially for self-employed women who divorce.
- 34% of self-employed individuals have no pension at all, according to Boring Money research.
- This figure likely disproportionately affects women, who make up 47% of the self-employed workforce but experience a 14.9% median gender pay gap compared to men.
- Lower earnings translate to less disposable income for pension contributions, especially considering irregular income fluctuations inherent in self-employment.
- Experts warn that this scenario leaves many self-employed women at risk of poverty in retirement, reliant solely on the State Pension which currently amounts to only £203.85 per week. They will need at least ten qualifying years on National Insurance record to get any State Pension, and at least 35 qualifying years to receive a full State Pension.
Financial advisers have voiced their concerns that the gender pay gap is creating a “domino effect” whereby lower wages equates to less National Insurance contributions, which directly affects State Pension entitlements. Contributing to a private pension then becomes a luxury, which not many self-employed women can afford with the cost of living especially high in the UK compared to other parts of Europe.
The situation is compounded by several factors:
Lack of automatic enrollment: Unlike employees, self-employed individuals must actively choose and contribute to a pension, often navigating a complex financial landscape.
Misconceptions and lack of financial literacy: Many women remain unaware of the long-term implications of not saving for retirement.
Caregiving responsibilities: Women disproportionately take on unpaid caregiving roles, limiting their earning potential and pension contributions further.
Government measures have been proposed such as auto-enrollment for self-employed individuals, targeted financial education programmes, and childcare support which would create a fairer environment for women to plan for their future. However, many self-employed people also like a hand-off approach.
Campaigners also highlight the need for financial institutions to develop accessible and user-friendly pension products specifically tailored to the needs of self-employed women.
The clock is ticking for self-employed women in the UK. Without urgent action, the gender pay gap could translate into a retirement gap, leaving many women facing an insecure and financially challenging later life.
What’s the difference between a private pension and a SIPP?
Both UK private pensions and SIPPs are long-term savings vehicles designed to help you build a pot of money for retirement, but they have some key differences:
Investment control:
- Private pension: The pension provider chooses the investments for you, based on your risk tolerance and chosen options. You have limited control over individual investments.
- SIPP (Self-Invested Personal Pension): You have much more control over your investments, choosing from a wide range of options like individual shares, funds, investment trusts, and even unquoted companies (with restrictions). You can manage your investments yourself or use a financial advisor.
Investment range:
- Private pension: Offers a limited range of investment options, typically pre-defined funds chosen by the provider.
- SIPP: Offers a much wider range of investment options, giving you more flexibility to build a portfolio tailored to your risk tolerance and goals.
Fees:
- Private pension: Expect to have lower fees due to economies of scale, as the provider manages investments for many people.
- SIPP: You may have higher fees due to the increased complexity of managing individual investments and providing a wider range of options.
Suitability:
- Private pension: Suitable for those who want a simpler option with less responsibility for investment decisions.
- SIPP: Suitable for those who want more control over their investments and are comfortable with managing risk or using a financial advisor.
Other differences:
- Minimum contributions: SIPPs may have higher minimum contributions than private pensions.
- Taxation: Both benefit from tax advantages, but SIPPs offer unique tax benefits for transferring existing pension pots.
- Death benefits: Both offer death benefits for your beneficiaries, but SIPPs offer more flexibility in how these are paid.
Choosing the right option:
The best choice for you depends on your individual circumstances, risk tolerance, and investment knowledge. If you are comfortable with making investment decisions and want more control over your pension, a SIPP might be a good option. However, if you prefer a simpler approach and are less comfortable with investing, a private pension might be more suitable. It is always recommended to seek independent financial advice before making any decisions about your pension.
Pension entitlement in the event of a divorce in the UK
Married spouses in the UK do not automatically have a right to their spouse’s pension in a divorce, but they may be entitled to a share of it under certain circumstances. Here’s what you need to know:
Pensions are considered marital assets in the UK, just like other financial assets such as houses and savings. This means that the court will take both spouses’ pensions into account when dividing their finances during a divorce.
The specific rules on how pensions are divided can vary depending on:
- The location within the UK: England, Wales, and Northern Ireland generally consider the total value of all pension rights, regardless of when they were built up. In Scotland, only the value of pensions built up during the marriage or civil partnership are considered.
- The specific details of the marriage and pensions: Factors like the length of the marriage, the income of each spouse, and the relative value of each pension will all be considered.
There are several ways your spouse’s pension might be shared in a divorce:
- Offsetting: The value of your spouse’s pension may be “offset” against other assets you receive in the settlement, such as the house.
- Pension sharing orders: These allow a share of the pension pot to be transferred to your own pension scheme.
- Pension earmarking: This option “flags” a portion of your spouse’s future pension benefits to be paid to you when they retire.
Take note:
- The State Pension (the basic government pension) is not typically shared in a divorce. However, there are some exceptions, such as “protected payments” under the old State Pension rules.
- This is a complex area of law, and it’s highly recommended to seek legal advice from a solicitor specializing in family law to understand your individual rights and options.
DISCLAIMER: This article does not constitute financial advice.
Here are some resources:
- MoneyHelper: https://www.moneyhelper.org.uk/en/family-and-care/divorce-and-separation/divorce-dissolution-pensions-appointment
- Unbiased: https://www.ftadviser.com/pensions/2023/01/03/do-not-neglect-pensions-in-divorce-settlements/
- Citizens Advice: https://www.citizensadvice.org.uk/family/how-to-separate1/getting-a-divorce-or-dissolution/