The pay gap may be closing, but the fact is women don’t save as much – or as cleverly – as men. Yet all is not lost: financial expert Merryn Somerset Webb reveals how we can eliminate the wealth gap, too – and get richer.
Look at the statistics around women and money and you might wonder whether 100 years of feminism has really delivered. Despite a century of fighting for equality, 74 per cent of women are worried about their financial futures and 68 per cent of us consider our financial situation to be no better than fair.
Sadly, we have reason to be worried. We hit 50 with, on average, private pension savings of only £56,000, while men’s come to more like £112,000. A recent survey also showed that 43 per cent of women wouldn’t be able to continue their current lifestyle for more than a month if they lost their income – the male equivalent is only 30 per cent.
The obvious reason for this is that there’s a time lag to the building of female finances. Women have historically earned less than men – so we haven’t saved as much cash or built as much pension. That’s changing: the gender pay gap has been all but eliminated for the under-35s, pointing to the next generation of women closing the wealth gap fast: research suggests that women now control 30 to 40 per cent of the world’s investable wealth, and this is rising.
But there is rather more to it than just this. Having savings is only the beginning – what really matters is what you do (or don’t do) with the money you save. And women, rather more than men, tend to keep it in cash, something that makes a huge difference to our long-term wealth. The average annual return on equities over the past 100-odd years has been around six per cent. On cash it has been more like one per cent. That kind of difference adds up to real money (see Invest in an ISA, below).
Why do we do this? It’s partly due to the fact that markets have long been considered a male domain – and more of a hobby than a normal act of financial administration. Look at the books on the matter published over the past couple of hundred years and you will get the idea. Markets are discussed as being somehow stereotypically female, using words such as ‘volatile’, ‘fickle’ and ‘capricious’ – something to be battled into producing returns by men with brute strength and the odd chart.
Ask a wealth manager about the difference between her male and female clients and she will often say (with the caveat that it is a generalisation) that men often still treat it as a game – one that comes with the goal of beating the market or other participants. Women, they say, tend to have more real-life goals: to build an education fund, make sure mortgages can be paid off, have a care fund or be sure that retirements aren’t miserable.
However, it’s not just about this characterisation of the whole thing as an amusing battle. It’s also about the way the financial sector sidelines women as clients: one long-running ad in the fund management industry features a man with a gun hunting down the elusive profit animal. And it’s about the language used. The way investing is portrayed – as difficult, complicated, a gamble, a battle, a ‘man thing’ – has stuck with us.
All this is maddening because women need to build wealth in an even more concentrated manner than men do. That’s partly to compensate for career breaks and partly because we live longer – an extra 2.4 years when retiring at age 65, says Kate Smith, head of pensions at Aegon. But it’s also maddening because it is based on a huge misconception. You see, investing isn’t actually complicated at all. Indeed, the great joy of being an investor in the UK is that, logistically at least, it is simple. We have some very straightforward systems and some fabulous financial institutions. In fact, if you are in work in the UK, you are almost certainly already an investor. Everyone earning more than £10,000 is auto enrolled in their employer’s pension scheme: earn £30,000 a year and a minimum of £125 a month will already be being put into an investment fund on your behalf (a total of five per cent of your salary). It’s a good start. Beyond this the UK has an excellent tax-efficient savings system that includes the ISA (individual savings account) and the SIPP (self invested personal pension), which between them allow you to invest up to £60,000 a year.
Were all working women to do anything close to that, the gender investing and wealth gaps would soon be as much a part of history as the gender pay gap is becoming.
Invest in an ISA
Every year you can put up to £20,000 into an ISA. You can hold it in cash or in stocks and shares. Ideally, once you have a cash cushion, it should be in shares. The key thing is to think about your ISA not as a thing in itself but as a wrapper – a box into which you can pop your assets to protect them from tax in the future. Once in the wrapper, no tax will ever be payable on capital gains, dividends or interest received. Open your ISA account at an online broker such as Hargreaves Lansdown (I have mine there) or AJ Bell. It’s quick, simple – and there is genuinely no excuse not to do it.
Understand your pension
Some lucky people (mainly public sector workers) have defined benefit (DB) pensions. This means that on retirement they will receive a percentage of their salary every year, inflation-linked, for ever. That’s very nice. It’s also no longer normal. The rest of us have defined contribution (DC) pensions. This means that the value of our retirement pot (which we can draw on from 55) depends on how well the investments we have put in it have performed over time.
We will mostly have DCs via our employers with auto-enrolment but we would all be wise to top that up with a SIPP . These, just like ISAs, are wrappers into which we can put assets we wish to shelter from tax. The difference is that with ISAs you save tax when you take the money out and with pensions you save it when you put the money in. Add money to your SIPP and you automatically get your 20 per cent income tax back and have the right to reclaim any more if you are a 40 or 45 per cent tax payer via your tax return. The money is then left to grow tax-free until it is taken out, at which point you will pay income tax on those withdrawals.
It’s time to go cashless
In the tax year 2017/18 women opened 5.2 million cash ISAs. For men it was 4.4 million – but they also took out many more stocks and shares ISAs. And that is the kind of thing that makes the gender wealth gap hurt. Cash ISA accounts were introduced in 1999. If you’d used the full allowance every year you would have accrued a total of £20,628 in interest – with no tax to pay. Sounds great – until you look at what those same savers could have made if they had invested in the UK stock market instead. According to Scottish Friendly the answer is £70,987 – more than 300 per cent more. While everyone should hold an emergency cash fund (around six months’ worth of spending money) and no one would want to risk money saved for short-term goals (for example, a house deposit), those two things aside, it’s time to put your money to work.
What to put in your ISA and your SIPP
Once you’ve opened your wrapper accounts, what on earth should you put in them? This, I’m afraid can be the mildly complicated bit. Investing means buying shares – small bits of companies listed on stock exchanges. And choosing the right ones and then buying them at the right price is tricky. The good news is that most of us shouldn’t bother choosing shares. Instead we should choose funds that invest in shares and therefore give us exposure to a diversified selection of shares. We can either do this by buying index funds that simply aim to track the stock market as a whole (these are ‘passive’ funds), or by buying actively managed funds (known as ‘active’), which aim to use the skills of fund managers to outperform the stock market as a whole. You can get help choosing these from magazines such as MoneyWeek and Investors Chronicle, as well as from the personal finance sections of the newspapers. The key, however, is to make sure that you have a selection of funds and that they are low cost (costs multiply nastily over time). Don’t pay more than 0.3 per cent commission a year for a passive fund or 0.9 per cent for an active fund.
Earn less. But don’t save less
Fifteen per cent of women are not paying into a pension of any kind (for men it’s 11 per cent). But even when we are, we tend to end up saving less. Some of this is down to career breaks to have children or to care for relatives. However, you don’t have to be working to pay into a pension. You are allowed to put in up to £3,600 (this includes your tax relief) every year. If you have an earning partner, perhaps discuss how you might do this together. You retiring with no financial problems is as much your partner’s gain as yours. You could also contribute more before you go on maternity leave to turbocharge things a little.
Auto-enrolment: opt in not out
You can only enter your firm’s auto-enrolment pension scheme if you earn over £10,000 a year. That’s an issue for women working part-time or for those with more than one job, none of which meets the threshold. That said, if you earn up to what is called the ‘lower earnings threshold’ (currently £6,032) you can ask to join and your employer must accept you on to the scheme. If you’re below that threshold, you can but ask. And you should.
Call in the experts
Some people like to get stuck in and choose all their investments themselves. You don’t have to. If you have a considerable amount of money already there are no end of traditional wealth management companies that will do absolutely everything for you. If you haven’t (or you want to keep your investing costs down; outrageously, some of those companies will charge you in excess of 2.5 per cent of the value of your assets a year to invest them for you), there are a number of new online wealth management companies that will do everything for you. Sign up, decide how much risk you want to take (you will usually choose a factor between one and five: one suggests you can’t bear the idea of losing any money at all and five that you are happy to take the risk of medium-term volatility if it means your long-term returns will be higher). And that’s that: the firm will invest the money in a variety of funds that track the market for you. All you have to do is remember not to obsess over the short-term returns. This is a long-term game.
The state pension: yours at 67?
The state pension age for women was raised to 65, the same as men, for the first time in November last year – two years earlier than originally planned when the Pensions Act 1995 passed. But don’t assume that’s when you’ll get yours. It isn’t. The age rises to 66 for men and women in 2020, then 67 by 2028 and 68 by 2039. If life expectancy continues to increase there is every chance the transitions to 67 and 68 will be brought forward and that a state pension age of 70 or upwards could end up on the cards. To find out when you get your pension and how much to expect, go to gov.uk/check-state-pension. The key point here is this: don’t rely on your state pension to finance the retirement of your dreams. It won’t.
Merryn Somerset Webb is the editor-in-chief of MoneyWeek