If you live in the UK and you are in an employed job, chances are you are auto-enrolled into a Defined Contribution pension plan. What does that mean? That means that yourself and your employer are both contributing a set percentage of your wages into a pension plan.
Let’s say your salary is £35,000/year, and both yourself and your employer contribute 4% to your pension pot. That means that £642 goes into the pot each month. Let's, for simplicity, say that you continue this for 40 years, until retirement. You could then be looking at a pension pot of £1,045,240 (assuming a net 4.05% return and adjusting for inflation).
That sounds like a fair projection, right? However, if you are thinking about having children, or if you already do, we need to factor that in as well. Let’s say you would like to have two children. New mothers in the UK take on avg 39 weeks of leave, and unless your employer chooses to pay you more than statutory maternity pay, that sadly means 78 weeks of reduced pension contributions. I was more than a little upset when I realised this!
Let’s look closer at our example to understand how maternity leave can affect your pension. Statutory maternity pay is currently £156.66 per week, or about £680 on an average month, compared, if we continue the example of a £35,000 salary, to your normal take home pay of £2,96167.
Yep, your monthly pay during maternity leave could be almost the same as what normally gets paid into your pension plan!
A pension plan is an incredibly lucrative way to grow your money for two main reasons. One - you don’t pay tax or NI on your pension contributions. And two - it has a long time to grow and compound! Therefore, contributions we make in our 30s (the average age at which a woman becomes a mother is 31 years old, according to ONS, 2022) have decades to grow and will make a big difference to our retirement income.
Carrying on the example of a £35,000 salary - by the time you reach state pension age of 68, you could have lost out on over £17,500 compared to those who don’t have children or receive full pay during parental leave.
So, and this is the important part of this blog: what can we do about it? How can we minimise the negative impact parental leave has on our pension? The first thing to do is to find out what your employers parental leave policy is, and find out if there's any scope to negotiate better parental pay or pension contribution by your employer. Secondly, consider increasing your pension contribution, even by 1%, to offset periods with lower contributions.
Remember: if you want children, starting a family is one of life's most magical experiences. A reduced pension plan should not put you off this, but it is still important to understand how becoming a parent can impact you financially so you can make the right choices for you.
Disclaimer: In this example, I have used an annual salary of £35,000 throughout a 40 year career, adjusting salary for a 2% inflation rate. I have not specified when in the example one would have children and this would affect the calculation. I have used 4.05% annual growth, based on FCAs recommended intermediate return rate of 5% minus 0.95 for platform fees and fund fees which will vary as well. Some of these calculations are run during the final stages of pregnancy so please forgive any occurrences of inaccuracy.