How a two-year hiatus from work could deplete your pension by £26,000

Career breaks are becoming more and more common, but since gaps accumulate over time, it's crucial to take precautions to safeguard your pension

A career break can be taken for a variety of reasons, such as traveling or taking care of family, but it's crucial to consider your pension while doing so.

According to research by consulting firm Barnett Waddingham, a two-year career break could result in a 25,600 reduction in the average UK worker's retirement pension.

Based on the Pension and Lifetime Savings Association's estimates of living expenses, that represents more than 1.5 years' worth of essential retirement expenses.

It is concerning at a time when many people are already in danger of experiencing a scarcity in retirement due to insufficient savings and rising living expenses.

According to independent data released by Scottish Widows, two-fifths of working people are currently at risk of living in poverty after retirement.

Women are particularly affected by gaps in their pension contributions because they are more likely to take time off work to take on caregiving duties. As a result, they are more likely to experience a retirement income shortfall.

The problem is of a considerable size. According to Barnett Waddingham, more than nine million workers are either taking or intend to take unpaid leave, which means they will not be receiving benefits from workplace pension contributions.

Fortunately, there are things you can do to lessen the impact.

The consultancy calculated that you could recover the losses from a two-year gap by increasing your annual pension contributions by 0613 percentage points when you return to work.

Paul Leandro, a partner at Barnett Waddingham, stated that although the traditional career path has changed, people's retirements cannot be jeopardized.

"Fortunately, this disparity can be closed with small increases in pension contributions. However, there is serious concern that many people are still ignorant of this issue at a time when pension engagement is already low," he continued.

For younger employees, career breaks may prove more expensive.

Because investment returns compound over time, taking an unpaid career break early in your career may end up costing more than waiting until you are older.

Of course, depending on how this changes and your pay, the full impact will be different. It may appear that the pattern is different for those who, halfway through their career, receive a sudden promotion and a significant pay increase.

Barnett Waddingham started out with a salary of £25,000 at age 21, and it will rise by 3% annually until he retires at age 66.

Additionally, the calculations are based on the assumption that you maintain the default pension contribution rate of 8% (which is composed of employer and employee contributions) and attain 5% annual investment growth.

How to increase your pension.

As previously discussed, one of the best ways to lower your risk of a retirement shortfall is to increase your pension contributions. Think about increasing by more than the minimum amounts shown in the above table.

In order to help you have a comfortable retirement, Scottish Widows advises putting 1215 percent of your salary into your pension annually. This amount is the default amount under auto-enrollment rules, which is made up of employer and employee contributions.

This comprises tax relief, employer contributions, and your own contributions.

There are generous employers who will match your contributions up to a certain amount if you raise them above the default amount.

You should also think about continuing to make pension contributions while you are unemployed, depending on your financial situation.

If you're taking time off to travel, your budget probably won't allow for this. However, if you are in a relationship, your partner may be able to assist you if you are taking time off to care for small children.

When it comes to caregiving duties, a disproportionate number of women are taking on the role. This, along with additional factors, has led to a persistent gender pension gap.

A study by digital wealth manager Moneyfarm found that 42% of men would not be ready to make contributions to their partner's pension plan while on maternity leave. Before having children, it is worthwhile to have a conversation to ensure that your opinions are in agreement.

Carina Chambers, the firm's pensions technical expert, stated, "It is crucial that we address these disparities and cultivate a culture of shared financial responsibility."

A step toward attaining true gender equality is to promote candid discussions about financial planning and the value of helping one another reach their long-term financial objectives.

Those without jobs who are still able to make contributions to a pension plan might think about opening a new SIPP or personal pension plan, or making payments into an old workplace plan. When selecting an account, be sure to carefully consider the fees and investment options.