I am due to have a baby in a few months and I am keen to continue making pension contributions during my maternity leave. I currently pay above the minimum contribution level in order to get higher matched contributions from my employer.
I asked my HR department about how to maintain payments while on leave. I was told I will be on full pay for the first 20 weeks and normal contributions will be deducted.
When I go on to statutory maternity pay, my contributions will continue based on the lower level of pay, and my employer’s will carry on being based on the full rate of pay, though I won’t be able to do salary sacrifice in that period.
Planning ahead: What’s the best way to max out my pension contributions while on maternity leave?
If I then go on to take unpaid maternity leave, HR tells me I will make no contributions and neither will my employer, but it suggests I consider increasing my contributions for a time when I return to work to make up for this.
I’m not really satisfied with this response because ideally I’d like to carry on paying my current higher contributions and getting them fully matched by my employer through all stages of my maternity leave.
Do I have a right to this? If I say I want to pay in the usual amount, even in the unpaid maternity leave period, will this mean my employer is required to pay in and fully match my payments too?
If not, and I just have to catch up when I return to work full time, would it be better to pay a lump sum into my pension then, or increase my contributions for a period as HR suggested?
Tanya Jefferies, of This is Money, replies: A lot of women make a good start with pension savings but start falling behind if they have children.
You are therefore sensible to fill any gaps necessitated by maternity leave immediately, or as soon as you can, as otherwise you might never make them up again.
Even short pauses in saving for retirement can make a difference, especially when you are young, as you forfeit not only the sums involved but the immensely valuable compound growth on your pension investments that builds up over time.
If you are in a couple, married or have a civil partner, it is a good idea to take a joint approach to maximising both your pensions throughout your working life, including during maternity leave.
For example, if you temporarily cannot afford contributions during maternity leave but your partner has the money to help you, ask them to do so because this will benefit you both in the long run.
This goes too for making full use of matched contributions from your employers, as you are currently doing.
This is free money – plus extra tax relief from the Government on top – you won’t receive in your pension otherwise.
It makes sense for both partners to pitch in and help subsidise each other paying into your pensions whenever necessary, as in the end you will enjoy a richer retirement together.
And if you unfortunately split up, but your pension pots aren’t too unbalanced – as they historically have been between men and women, mostly due to pay differences and the latter doing unpaid caring work – there will be less hassle and hostility over dividing them.
All that said, even for those with the best intentions like you, the maternity leave system can get complicated regarding pension contributions.
We asked a financial expert to explain how to work out how much you might lose and the best way to go about filling the gap.
Laura Suter, head of personal finance at AJ Bell, replies: Firstly, well done on thinking ahead on this.
Women tend to have smaller pension pots then men, partly because they are more likely to take career breaks when they have children.
This leaves them with a big gap in their pension contributions during that time. It’s great that you’re planning ahead for your maternity leave.
What your employer has told you is correct and unfortunately the system isn’t very flexible.
Your employer will carry on paying in their current contribution through your maternity until you go onto the period with zero pay.
However, after the first 20 weeks your personal contributions will be based on your lower level of pay – which is where your personal pension gap will begin.
How big is the financial hole you will need to fill?
Your first task is working out what your pension gap will be. It gets pretty complicated but it’s possible.
Laura Suter: Your employer will carry on paying in their current contribution through your maternity until you go onto the period with zero pay
You need to work out how long your maternity leave will be – if you’ve already discussed this with HR they should be able to provide you with a breakdown of how long you’ll be on full pay, statutory pay and no pay.
Then you should check your most recent pension statement and see how much both and your employer contribute each month.
You can disregard the first 20 weeks of your leave, as you say you will be on full pay and so neither you nor your employer’s contributions will reduce.
The next stage is working out how much of your remaining leave will be on statutory maternity pay.
Your employer will continue to make full contributions on your behalf during this period, but your personal contribution will be based on your statutory maternity pay.
So you’ll need to do the maths to work out how much that amounts to and what pension gap it leaves you with.
And finally, you need to work out how long your final period of unpaid leave will be, where you are getting zero pension contributions, and what the pension shortfall is during that time.
What is the best approach to making up the missing contributions?
You have three options if you want to cover the gap: increase your pension contributions before you go on maternity leave; increase them when you return to work; or a combination of the two.
Some companies will only allow you to change your pension contribution percentage once a year or at certain life events – and having a child is usually one. Depending on their rules that might force you into only boosting contributions when you return to work.
You also ask whether it’s better to pay it in as a lump sum or as an increased monthly contribution.
This depends on a couple of factors. First: your employer’s matching rules. If you’re not exhausting all the employer matching at the moment then you’re better off increasing your monthly contribution as your employer will add more to your pension too.
The next factor is whether you pay into your pension by salary sacrifice.
If you do then your pension contributions are effectively taken before any tax or National Insurance is paid, which saves you more money than if you just paid in a lump sum and reclaimed the tax.
What other steps can you take to maintain your pension?
There are a couple of other things to bear in mind. Because you accrue holiday and bank holidays during maternity leave, lots of women take this at the end of their leave, to reduce the period where they are unpaid.
During this period you will have effectively returned to work for payroll purposes, so your pension contributions will return to normal. This can help to reduce the pension gap.
Secondly, if you decide to return to work part-time, or on fewer hours than you currently work, that will have a big impact on your pension contributions.
If you want to maintain your pension you’ll need to significantly increase your percentage contribution to compensate for your lower salary.
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