Reducing work hours might create a £58,000 deficit in your pension: strategies to fill the shortfall
Part-Time Work and Retirement Savings: A Closer Look
Reducing work hours from full-time to part-time can have a significant impact on retirement savings. This is largely due to lower earnings, which lead to smaller contributions to both workplace and personal retirement accounts, reducing the total pension wealth accumulated over a career.
In the UK, women disproportionately work part-time or take career breaks, resulting in lower private pension savings and gaps in contributions to state pensions. This contributes to the gender pension gap, which remains large (around 38%) partly because of these working patterns.
Even though more women than before participate in workplace pensions due to auto-enrollment policies, their pension wealth remains smaller on average, partly because part-time and career breaks limit contributions.
Inflation also erodes the real value of retirement savings, making it more challenging to maintain purchasing power during retirement. Part-time workers might be less able to keep up with inflation in their savings accumulation phase.
However, the impact of going part-time on retirement savings is not entirely negative. Working part-time in retirement can be a useful strategy to supplement income without drawing down savings, helping to stretch retirement funds longer.
In the scenario of increasing contributions to 13% (10% employee contributions and 3% employer contributions), the total pension pot at age 68 would be £206,000, just £4,000 lower than if working full-time. This suggests that increasing contributions could potentially eliminate or reduce the £58,000 gap caused by going part-time at age 35.
It's important to note that the calculation of the reduced pension pot allows for 2% inflation, 3.5% annual salary growth, and 5% investment growth on the assets in your pension. Regularly reviewing finances to gradually increase pension contributions over time, particularly after a pay rise or reduction in other expenses, could potentially help bridge the gap.
The power of compound interest suggests that the earlier and more you save, the more your money will grow. Therefore, it's crucial to start saving as early as possible and to make the most of any opportunities to increase contributions.
Lastly, those who have to reduce their hours due to ill-health or desire for a more balanced lifestyle could also be impacted by a partially-funded retirement. Women are more likely to be affected by the impact of going part-time on their pension, due to disproportionate childcare responsibilities and the "good daughter penalty" that widens the gender pension gap in later life. The gender pension gap can widen for a second time in later life due to women taking on caring responsibilities for elderly parents.
In conclusion, while part-time work can offer flexibility and work-life balance, it's essential to consider its impact on retirement savings. Regularly reviewing finances, increasing contributions when possible, and seeking financial advice can help mitigate the potential negative effects.
- For part-time workers, lower earnings might lead to smaller contributions to personal-finance accounts and pension plans, eroding the total wealth accumulated over a career.
- Gold, as a potential investment for retirement savings, can serve as a hedge against inflation and help maintain future purchasing power, but it should be included as part of a diversified personal-finance strategy.
- Proactively managing property investments could serve as a complementary strategy to pension planning and help strengthen personal-finance in retirement as well as generate additional income streams.
