Article Summary
Taking a career break can have a significant impact on your pension savings. According to a study by Barnett Waddingham, a two-year career break could leave the average UK worker £25,600 less in their pension pot at retirement. This is based on the assumption that the worker is contributing 8% of their salary to their pension, with an annual salary increase of 3% and investment growth of 5%. Younger workers may be hit harder, as the impact of a career break on their pension is likely to be more severe due to the way investment returns compound over time.
What This Means for You
- Taking a career break could significantly reduce your pension savings, so it’s important to consider the potential impact before making the decision to take time off.
- If you do take a career break, consider increasing your pension contributions when you return to work to help recover any losses. According to Barnett Waddingham, increasing your annual pension contributions by between 0.6 and 1.3 percentage points could be enough to recover the losses associated with a two-year gap.
- Women are more likely to be affected by gaps in their pension contributions due to taking time out of work for caregiving responsibilities. It’s important for couples to have open conversations about financial planning and to consider ways to support each other’s long-term financial goals, such as paying into a partner’s pension scheme during maternity leave.
- If you are not working but are in a position to continue contributing to a pension, consider paying into an old workplace scheme or opening a new personal pension or SIPP. Be sure to look closely at the fees and investment choice before choosing an account.
- It’s important to be aware of the terms and concepts related to pensions and retirement planning. Key terms to understand include pension contributions, investment returns, and compound interest.
Original Post
There are many reasons to take a career break, from exploring the world to caring for family members, but it is important to give some thought to your pension in the process.
A two-year career break could leave the average UK worker £25,600 less in their pension at retirement, according to analysis from consultancy Barnett Waddingham.
That is enough to cover more than one and a half years of essential retirement expenses, based on living costs from the Pension and Lifetime Savings Association.
At a time when many are already at risk of retirement shortfall thanks to inadequate savings and soaring living costs, it is a cause for concern.
Separate data published by Scottish Widows shows two-fifths of the working population is now at risk of retirement poverty.
It is women who are the hardest hit by gaps in their pension contributions, as they are more likely to take time out of work to pick up caregiving responsibilities. As a result, they are more likely to face a shortfall in income when they retire.
The scale of the issue is significant. Barnett Waddingham says over nine million workers are either taking or planning unpaid leave, meaning they will not be benefiting from workplace pension contributions.
The good news is there are steps you can take to help mitigate the effects.
Increasing your annual pension contributions by between 0.6 and 1.3 percentage points upon returning to work could be enough to recover the losses associated with a two-year gap, based on the consultancy’s calculations.
Career breaks could prove more costly for younger workers
Taking an unpaid career break earlier on in your career could prove more costly than waiting until you are older because of the way investment returns compound over time.
Of course, the full impact will vary based on your salary and how this changes.
Barnett Waddingham has assumed a starting salary of £25,000 aged 21, which increases by 3% each year until retirement at age 66.
The consultancy’s calculations also assume you stick to the default pension contribution rate of 8% (made up of employee and employer contributions), and achieve annual investment growth of 5%.
