Are third party contributions to pensions a way to help combat the gender pensions gap? Caitlin Southall, Pension Technical Manager at Nucleus, looks at the technical issues.
Momentum seems to be building within the pensions industry in respect of closing the Gender Pensions Gap (GPeG). As a reminder, the gender pension gap is the median difference between the median male and female private pension wealth. The GPeG currently stands at around 35%. Whilst this figure is in itself shocking, perhaps more glaring is that research suggests that a women would have to work an extra 19 years in order to have the same private pension wealth as a man.
There are many drivers of the GPeG. One of these drivers is the Gender Pay gap, which currently stands at 14%. Put in simple terms, women tend to get paid less than men, so they will have less income to put into a private pension in readiness for their retirement. Women are more likely to work part time, or in lower paid positions which directly impacts their ability to build their pension. Women are also more likely to live longer – couple this with lower lifetime earnings and this results in a higher likelihood of a decreased standard of retirement for women.
Another driver is a lack of financial education amongst women. However, this is not a problem that only affects women- there is a significant financial education gap that requires targeted and large-scale funding and delivery. However as highlighted by the FCA’s Financial Lives Survey published last year, women are almost twice as likely to have low financial capability than men. One in three women surveyed in that report felt that they had low financial confidence.
Perhaps the main driver for the GPeG is career breaks. Women are statistically much more likely than men to take career breaks, particularly for caring responsibilities. These career breaks generate pauses in pension contributions. Now Pensions’ research showed that only 27% of women work ‘mostly full time throughout their careers’ compared with 45% of men.
Whilst the steps to narrow the gap will take time to embed, there are some immediate steps that clients and advisers can take to narrow the gap within individual households. Recent research undertaken by Nucleus into UK Retirement Confidence found that only 12% of UK adults surveyed were aware that you could contribute to another’s pension. And of the 78% that were unaware, only 21% of those would consider adding to another’s pension now they know it’s a possibility.
For many households, a pension is likely to be the second largest financial asset after a house. Yet despite this, pensions are often still viewed as a personal asset.
Third party contributions
Third party contributions are contributions made to a pension by someone other than the scheme member. Most commonly this type of contributions are made by a spouse, partner, parent, or other family member, but there doesn’t need to be any familial connection between the scheme member and the contributor. Employer contributions do not count as third party contributions. Individual providers may have additional criteria for the contributing party, so it’s always worth checking with the provider before planning to, or making, a contribution.
When it comes to taxation of third-party contributions, the contribution is dealt with the same as if the scheme member had paid the money to their own pension. Tax relief would be received by the scheme, not the person making the contribution to the pension. Annual allowance and money purchase annual allowance (MPAA) considerations would still apply.
Assuming that tax relief can be obtained, providers will likely reclaim this for the member at the basic rate of 20%. In the event that the scheme member was a higher rate taxpayer, they would reclaim tax relief in the usual way via their self-assessment.
There might be inheritance tax considerations to take into account, for both the third party making the contributions, and the scheme member.
Third party contributions offer a good way for couples to contribute to both partner’s pensions notwithstanding any career breaks. This is of course subject to finances permitting pension contributions, which in the current economy, may be challenging. However, for those that can contribute to pensions, growing two pensions as opposed to one might actually result in a better financial outcome for all. For example, if one partner has exhausted carry forward and has reached their annual allowance, contributing to another’s pension might offer contributions to be made, benefitting from tax relief.
Whilst third party contributions are not going to close the GPeG alone, they might be able to play a part in clients’ financial planning for growing household pension wealth in readiness for retirement.
