Retirement: Mind the (gender pay) gap

Flexibility in retirement doesn’t necessarily benefit women, who already suffer from smaller pension pots

Women – over and above men – have particular issues to tackle in terms of saving enough for their pension pot. The ongoing challenge they face is that of the gender pay gap, which puts them at a clear and unfair disadvantage because they end up receiving a smaller income in their working years, which then translates into difficulties in saving enough for their retirement.

As is often the case, the way a woman’s life might play out means that they end up taking time out of work to raise a family or care for elderly relatives. These circumstances can yield a smaller pension pot which, ironically, they could have to live off for longer, due to the probability that they will outlive their male partner.

Before the pension freedoms was introduced, such inequalities were gradually being addressed, such as the equalisation of annuities and insurance rates, and plans to regulate state pension ages. However, inequality nevertheless continues to affect women planning to retire and those who are already in their retirement years.

The lowdown on drawdown

A notable part of these new freedoms was to make ‘drawdown’ accessible to everyone – it had previously only been available to wealthier investors. Prior to the pension freedoms, the majority of people used their pension fund to buy an annuity, thereby giving them a guaranteed income in retirement.

The term drawdown means the direct withdrawal from a pension (usually a defined contribution pension – for example, a personal or workplace pension) with unlimited withdrawals. The investor can then choose to move their pension, all or in part, into drawdown once they turn 55 – note that the government is set to increase this age to 57, as of 2028.

A quarter of this fund can be taken as a tax-free lump sum, with the remaining amount still invested, and any amount of this can be drawn down at a time to suit you. Money drawn out beyond the 25% tax-free lump sum is subject to income tax.

If drawdown isn’t suited to your financial circumstances, there are other options to generate a retirement income for yourself. A lump sum can be withdrawn from an unaccessed defined contribution pension, without moving into pension drawdown. Of the amount extracted, 25% will not be liable to tax, while the rest will be subject to income tax. Another option would be to withdraw a defined contribution pension in one go – a quarter would be tax-free and the remainder would be considered an income, which subsequently might push people into a higher tax bracket.

The equality see-saw

The government’s pension freedoms change in 2015 provided more balanced opportunities in some respects, as drawdown is accessible to individuals with smaller pension pots, plus both men and women can now access their pots at the same age and in the same amounts. Women still face an uphill battle to create that sustainable retirement income, however, having a smaller pot than men, on average, and living longer.

The changes to equalise state pension ages have also meant further pressures for many women, as they have to wait longer to access the extra income. Other factors that could affect the reliability of their pension income in retirement are the fact that they are more likely to work part time (62% of women aged 52 to 69, compared with 24% of men) and are more likely to be a carer (25% of older women, compared with 12% of men).3

While men are more likely to have investment experience1 or even see themselves as investors2, women, on the other hand, are more susceptible to barriers when considering drawdown in retirement. The reliance on drawdown as the main source of retirement income without accounting for risk capacity or risk tolerance can see some women potentially using up their pot too quickly, or even not drawing enough because they are worried about running out of funds.

This scenario is know as the ‘gender drawdown gap’ – in other words, a lack of opportunity to draw enough money in retirement compared to men, and often little choice about how long women might want to work for.

Retirement reassurance

As with anything, the awareness of such challenges is a good place to start, in order to have a hope of facing the gender drawdown gap head on – and it’s important to be sure that your hard-earned money is working as smartly as possible for you. While pension drawdown can offer flexibility, it also requires some serious decision-making to be sure you’re making the right investment to have a sustainable income in later years.

Professional financial advice is crucial, as it can empower you to come to informed decisions and therefore make wise investment choices, as well as helping you to understand the possible knock-on effects.

Retirement planning is not just about making suitable product choices and knowing how much to draw down each year – it’s also about good relationships and understanding your end goals and potential challenges. Our professional advisers here at Wellesley can best support you with this – we work with you to find the best possible outcome to meet all of your financial needs, so get in touch on 01444 244551 to start planning your future, today.

“Income drawdown” will reduce the size of your pension fund and the investment growth may not be sufficient to maintain the level of income you wish to draw. If you withdraw money at a rate greater than the growth achieved by your investments, your remaining fund will reduce in value. The level of income you take will need to be reviewed if the fund becomes too small – this is more likely the higher the level of income you take.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.


1 Zurich UK, Drawdown? Is it working for consumers, 2018
2 The Wisdom Council survey of 2,250 UK women, Yes She Can, November 2019
3 ONS, Living longer: caring in later working life, 2019