How the Lifetime ISA could help close the gender pension gap

Most people have heard of the gender pay gap. But not everyone realises the knock-on effect this continues to have on pensions, and women’s income in later life.

• The gap in pension savings between men and women is estimated to be more than twice the size of the gender pay gap.
• In the UK, on average, women’s retirement pots are two thirds smaller than men’s.
• Research suggests that women are 50% more likely to retire without any private pension savings at all.

This article isn't personal advice. If you're not sure what's right for your situation, ask for financial advice. Pension, LISA and tax rules can change, and benefits depend on your circumstances.

Why is there a gender pension gap?

There are two obvious contributors – the pay gap between men and women, and the amount of time spent in and out of work.

To put this into context, women are typically paid 15.5% less than men, and as they earn less, they’re naturally saving less too. When you add time off into the equation the negative results are easy to imagine.

People take time out of work for lots of different reasons – but one of the most common examples is childcare. As soon as a couple has children, one parent (which could be the mother) might reduce their hours to take care of the kids. Women who are out of work or on reduced hours normally end up with much smaller pensions. That’s because they’re not earning or saving for as long, or as much as their male counterparts.

How the Lifetime ISA could help close the gender pension gap

If you have a workplace pension, increasing your pension contributions could help to close your pension savings gap (especially because your employer might offer to match them up to a certain limit). However, there’s another retirement product that you might have overlooked.

The Lifetime ISA (LISA) could play a crucial part in helping to close the gender pension gap, or indeed anyone’s pension savings gap. You can only open a LISA if you’re aged 18-39, and you can make contributions (and get the government bonus) until you turn 50.

Let’s say you’ve maxed out your employer contributions (i.e. your employer is paying in the maximum they offer to your workplace pension), and the company you work for doesn’t offer salary sacrifice as a pension option and they don’t agree to pay any National Insurance contribution rebate into your workplace pension. If you’re a basic-rate taxpayer, a LISA could actually be a more tax-efficient way to save for retirement.

With a LISA you get a 25% bonus from the government on anything you pay in up to the £4,000 annual allowance – meaning you could receive a bonus of £1,000 every tax year.

Add to that, any LISA withdrawals you make from age 60 or for an eligible first home purchase will be completely tax-free. That’s different to a pension where usually only up to 25% is tax-free and the rest taxed as income.

MORE ON LIFETIME ISAs

The flexibility of a LISA can also be appealing to those whose work is more likely to be affected by caring responsibilities at various stages in their life (e.g. childcare and looking after elderly relatives).

If push came to shove, the LISA allows you to access your savings early if you really need to. But there is an early exit penalty – 25% on what you withdraw, so you could get back less than you put in. Whereas any money in a pension is usually locked away until age 55 (rising to 57 in 2028).

Is a LISA always better than a pension for women?

Regardless of how much you earn, if you have a workplace pension, the first thing to do is maximise any employer contributions. Under the auto-enrolment rules, you’ll get free contributions from your employer. Your employer might offer contributions over the auto-enrolment minimum requirements, sometimes by matching your own contributions.

Once these have been maximised, you could then look at whether it’s better for you pay further savings into a LISA or a pension. You should also check whether your employer offers salary sacrifice and will agree to pay any National Insurance contribution rebate into your workplace pension. If they do then a pension will again be more tax efficient.

If you pay tax at a higher rate, a pension will often be much more tax-efficient than a LISA. That’s because as a high earner you can claim 40% or 45% in tax relief on anything you pay into your pension (subject to certain limits). Different tax rates and bands apply for Scottish taxpayers. In a LISA you’d only get a 25% bonus of up £1,000 each year.

More on pension tax relief

If you go on maternity leave, paying into a workplace pension normally works out better than a LISA because of the way the contributions are calculated.

The contributions paid by your employer will be based on your pre-maternity leave salary, whereas the contributions you make will be based on your maternity pay. This means you can enjoy the full contribution from your employer, while you pay in less.

It can be a good idea to consider maximising your contributions and those of your employer before going on maternity leave for this reason.

The future of the gender pension gap

The Institute for Fiscal Studies think the gap between women and men’s pension values could shift overtime. They highlight that the gaps in pension income today reflect the employment cultures and pension rules from years ago.

For example, mothers in the workforce are becoming much more common. The proportion of mothers with dependent children in the job market has grown substantially over the last 20 years from 66.2% in 2000 to 75% in 2019.

New laws, like automatic pension enrolment and the introduction of the Lifetime ISA, are also likely to have an impact on how people engage with their retirement savings, regardless of gender. These shifts in culture and savings products could mean that future pension and income gaps look very different in years to come.