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Pension: how taking a ‘holiday’ from contributing hurts retirement

Taking timeout to raise a child cuts a third off your pension, says Canada Life

  • One simple hack on maternity leave can mean getting a year’s NI contributions
  • Young people hit twice as hard by ‘pension holidays’

Taking ten years out to raise a child means losing around a third [29%] of your private pension, or roughly £2,500 a year*, according to figures from Canada Life.

It also means they would struggle to afford to take a tax-free cash lump sum when it comes to retirement, compared to others who could take a quarter of their pension out and still be in the same financial position.

Andrew Tully, Technical Director, said:

“Women generally still do the majority of child-rearing, and that means they pay a big price when it comes to financial security later in life. It’s unjust, and often leaves them financially vulnerable just when they deserve the chance to wind down.

“The solutions aren’t always inviting – work until they are 75 to make up the shortfall, or make a big increase in their contributions when they’re back at work.

“If it’s at all possible, continuing to make contributions while they are off is the best strategy.

“However, women can also help ensure they receive more of the full state pension by claiming National Insurance credits while off work. One area of confusion with the state pension and NI credits is the area of claiming child benefit. If your partner is earning over £50,000 most women won’t claim a child tax credit because they wouldn’t get the benefit. However, it’s vital to make that claim, as they will still receive NI credits which count towards the state pension.”

Pension holidays’ cost young people twice as much

The figures also reveal the impacts of taking a shorter holiday at different ages.

A 25 year old on an average salary would miss out on £800 a year in retirement after taking three years off, or around 10% of their monthly private pension*. Under the same circumstances a 55 year old would only lose around £400 a year.

Andrew Tully, Technical Director, said:

“Taking a pension holiday or a ‘gap’ year often costs around twice as much when you’re younger as when you’re close to retirement. That’s because the money you save earlier in life has more time to grow as an investment.

“Of course, a lot of these time outs aren’t something people can control. Illness and the need to look after relatives, for example, can come out of the blue, while bringing up children comes with its own financial sacrifices.

“If it’s in your control, taking a pension gap year when you’re older makes more sense. That’s a difficult argument to make when you’re 25 and keen to volunteer in Costa Rica, but the economic argument is quite compelling.”

Increasing contributions and tax-free cash

In order to make up for the lost pension, someone could work for roughly the same amount of years as they’ve taken off.

Alternatively, they could increase their contribution. Someone aged 25 and taking 10 years off to raise children would need to increase their contribution from 12% to 19% for the rest of their working life to get back to the same financial footing.

To receive the same income as if they hadn’t taken a 10 year gap, they could also choose to take no tax-free cash lump sum. This amount falls from 25% to 0% for someone taking ten years out without increasing their contributions.

* Figures are based on the below assumptions. Estimates are for a 12% pension contribution as a career average.

  • Age Pension Saving Begins 20 years
  • Salary £30,000 or £50,000
  • Retirement Age 65
  • Future Annuity Rate 4%
  • Contribution Rate 12%
  • Inflation/Salary Growth 2.5%
  • Investment Growth 5.0%
  • Tax Free Cash Taken 25%

Canada Life research based on in-house calculations

For people earning £30,000 each year - table shows the impact on private pension (pounds per year) for different lengths of holiday

  Length of holiday (years) and loss in pension income
Age at Holiday 1 2 5 7 10
25 -£283 -£559 -£1,350 -£1,846 -£2,546
30 -£251 -£496 -£1,196 -£1,636 -£2,257
35 -£222 -£440 -£1,061 -£1,450 -£2,001
40 -£197 -£390 -£940 -£1,286 -£1,774
45 -£175 -£345 -£833 -£1,140 -£1,572
50 -£155 -£306 -£739 -£1,010 -£1,394
55 -£137 -£272 -£655 -£896 -£1,236

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Stonehaven UK Limited and MGM Advantage Life Limited, trading as Canada Life, are subsidiaries of The Canada Life Group (U.K.) Limited. Stonehaven UK Ltd is authorised and regulated by the Financial Conduct Authority. MGM Advantage Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.