Post by Emma-Lou Montgomery, associate director at Fidelity International.
Today, there are several barriers which have prevented many women from investing in the stock market. A lack of time, confidence, access to the right information, industry jargon and not knowing where to start are just some of the obstacles that leave women thinking that investment is ‘not for them’.
Indeed, Fidelity’s research and report, The Financial Power of Women, found that the way investment is communicated by the industry is a huge barrier for women. 45% of women find this communication ‘complicated’, along with ‘incomprehensible’ (18%) and intimidating (18%)1.
Gender Pay Gap Impact On Pension Pots
However, in a world of stagnant wages, rising prices and low interest rates, investing for our future has steadily become more important. In addition, with our increasing life expectancy and the fact we can no longer rely on the state to look after us in old age, this is especially key if you’re female. Why? Three simple words with very wide ramifications: Gender pay gap. Women are still paid less than men, and as long as we fixate on the unfairness of this, we risk neglecting to address the very real long term implications this thorny issue has on our finances.
While the gender pay gap is reported widely, the knock-on impact to our pension pots can be significant. Indeed, according to IFS data, the hourly wages of female employees are currently about 20% lower than men2. On top of earning less, women are also more likely to go part time or take career breaks to raise children or look after sick or elderly relatives, which often means they are saving less at the most pivotal time, widening both pension and pay gaps in the months following childbirth.
So remember, the more you invest before reaching middle age, the more you’ll have when you’re older. And the stakes are high; women in their 60s have on average £100K less in their pension pot compared to men of the same age3.
Pension Pot
The good news is that anyone can invest, and chances are that you already are! If you are in full-time work, you will be automatically enrolled into your workplace pension scheme. This is also the case if you’ve recently found yourself furloughed. The best thing about it is that it’s essentially free money: a percentage will be deducted from your salary; your employer will contribute on top of that and you will also receive tax relief from the government. This is all then invested to build up a pension pot.
If you’re self-employed, you’ll need to think about setting up your own pension or investments in order to save for your retirement.
According to the Department for Work and Pensions, more women (88%) are enrolled and saving into a workplace pension than men (86%)4. So, while we still have a gender pension gap, it’s encouraging to see the situation improving as more women take control of their financial futures. And there are small steps that we can all take to help us prepare better for the future.
The Extra 1%
Our research and report found that if a woman invested an extra 1% of her salary into her workplace pension, she would close the gender pension gap in retirement. That’s equivalent to topping up your pension by an extra £35 a month from your salary1.
Of course, it’s not just retirement we need to consider when thinking about future life goals. No matter what your hopes and dreams for the future, be it a once in a lifetime trip around the world, getting married, starting a family, or buying your first home; all these milestones cost money and can be significantly helped by starting to invest as early as possible.
How do I do it? Here’s a quick fire approach to investing for different budgets:
1.Budget Of Under £1,000
A common misconception is that you need to have a stash of cash to start investing. If you’re setting up a stocks & shares ISA, you can start with as little as £50 a month as part of a regular investing plan.
Drip feeding your money into an ISA is not only much easier on the wallet than stumping up a large lump sum each year, but you will also benefit from something called pound cost averaging. This means you buy more when prices are low and fewer when prices are high which can help to cushion your portfolio from ups and downs in the stock market.
How To Start
Start by picking an ISA provider – Fidelity International is one, but Hargreaves Lansdown and AJ Bell also provide ISAs. Next, choose the investments you want to hold in your ISA. If you’re struggling to make a choice, remember there are ‘ready-made’, low maintenance solutions out there like multi-asset funds which do the job of choosing the right mix of investments for you.
Fidelity’s Select 50 Balanced Fund offers a ‘best of the best’ selection of our preferred funds from the Select 50 range. This is important because holding a range of assets in line with your investment goals and risk tolerance can help spread the risk. You know the phrase about not keeping all your eggs in one basket?
2.Budget Of £1,000 – £5,000
If you have a slightly larger budget, you might be tempted to invest in the Lifetime ISA. After all, what’s not to like about an offer of free money from the Government?
This is what the Lifetime ISA promises savers and investors, boosting anything you pay in by 25%. But before you get too excited remember that the 25% bonus for Lifetime ISAs is dependent on the money saved being used only in a prescribed set of circumstances.
How It Works
Here’s how it works: you can pay in up to £4,000 per financial year, with a bonus worth 25% of contributions added by the government at the end of it. The money can be held in cash or in stocks and shares, as with standard ISAs. Anyone aged between 18 and 40 can take out a Lifetime ISA and can claim the bonus until they reach age 50.
To access the money without penalty, it must be used either to buy a first property or for retirement after the age of 60. If the money is used for any other reason, a 25% penalty is taken from the total balance before you get it back.
So, £4,000 paid in over a year is eligible for a £1,000 bonus, taking the balance to £5,000. If the penalty is then applied 25% of £5,000 is taken (£1,250), leaving you with £3,750 – £250 less than you paid in.
This makes it vital to use Lifetime ISAs only when you are certain that your circumstances will satisfy the withdrawal rules when the time comes. Of course, the problem is that none of us can know for sure what our future may hold.
Employer Pensions Contributions
More importantly, the majority of employees now have a workplace pension that benefits from employer contributions – and even the least generous of these add up to more than the 25% bonus from a Lifetime ISA.
So, if you have access to a company pension, this should be your first port of call, with the Lifetime ISA more suited to the self-employed paying basic rate tax and those who have exhausted their annual pension saving allowances.
3.Budget of over £5,000
If you have a slightly larger sum to invest, a fundamental question is whether you should be putting the money into an Individual Savings Account (ISA) or a pension like a self-invested personal pension (SIPP).
When it comes to investment limits, each tax year you can put £40,000 into a SIPP and £20,000 into an ISA. Of course, there is no reason why you can’t contribute to both an ISA and a SIPP, but your financial circumstances may dictate that you can only afford to invest in one of the two. If that’s the case, which should you choose?
Tax Efficient
ISAs and SIPPs are both highly tax-efficient ways to save, since investments in each will grow free of UK income and capital gains tax. But, when it comes to tax efficiency, SIPPs have an edge over ISAs. This is largely due to the upfront income tax relief you receive on your contributions.
While savings put into an ISA have most likely already been subject to income tax, when you contribute to a SIPP you receive tax relief upfront from the government. This means that if you pay 40% tax then a £1,000 contribution to your SIPP will cost only you £600 of taxed income.
Flexibility
However, ISAs need to have the upper hand over SIPPS when it comes to flexibility. There are strict rules on what you can do with your pension pot, when and how much you can withdraw from it, which makes a SIPP less flexible than an ISA.
With a SIPP you can’t access your savings until you reach pension age – currently 55, while an ISA allows you the flexibility to withdraw your money as and when you see fit.
Investors who need instant access to their savings are often put off by the restrictiveness of a SIPP, although the counter argument is that it does impose investment discipline and prevent you from dipping into your savings prematurely.
Bio
Emma-Lou has over 20 years’ experience as a financial journalist working in the national press. Today she specialises in commenting on investment, personal finance and retirement news.
Notes:
1 The full report is available to download from the GET INvested page: Fidelity.co.uk/womenandmoney
2 Source: IFS Wage progression and the gender wage gap: the causal impact of hours of work, 2018
3 Source: Pensions Policy Institute (PPI) Now Pensions’ Facing an unequal future – closing the gender pensions gap report, July 2019
4 Source: Automatic Enrolment evaluation report 2019, February 2020
