The DWP has issued an update as the Pensions Commission prepares to consider reforms
The DWP has released an update on a matter that affects large numbers of women. The Department for Work and Pensions is set to examine a series of recommendations on pension reform.
One matter it will be scrutinising closely is pension contributions for women. During paid family leave, both a woman and her employer will typically continue making payments into her workplace pension.
If you are eligible for Statutory Maternity Pay, family leave will generally be paid by your employer for up to 39 weeks (approximately nine months). Numerous employers provide additional payments beyond this (or for a longer period), so it is always advisable to consult your workplace family leave policy.
If your maternity, paternity or adoption leave will be paid by your employer, contributions to your workplace pension will generally continue as usual for at least 39 weeks.
However, if you opt to take any unpaid leave, all pension contributions will ordinarily stop. This usually occurs from weeks 40 to 52 during maternity or adoption leave, as you are entitled to the time off but payments such as Statutory Maternity Pay conclude at week 39.
If you do not qualify for any paid leave, your employer’s contributions will generally continue as usual for the first 26 weeks (approximately six months). This applies even if you qualify for Maternity Allowance, as this is a benefit paid by the government rather than your employer.
According to the People’s Pension website, an employer should pay the contributions based on the employee’s pay before she went on maternity leave, while the employee should pay contributions based on the pay she is actually receiving (for example, Statutory Maternity Pay).
An employee’s contribution could therefore be nil if her earnings do not exceed the lower earnings threshold when, for example, the qualifying earnings basis is being applied.
The issue was brought to public attention after Rachel Gilmour, Liberal Democrat MP for Tiverton and Minehead, questioned the DWP on whether it “has made an assessment of the potential impact of pension contributions being reduced during maternity leave on women’s retirement savings.”
Torsten Bell – Parliamentary Secretary (HM Treasury) – responded by saying: “Automatic Enrolment has delivered substantial progress in increasing workplace pension participation among women, in addition to the reforms delivered through the new State Pension which have reduced historic inequalities. However, for the significant gaps between men and women remain, both in terms of pension participation and wealth, reflecting wider structural inequalities in the labour market. Periods of reduced pay during maternity leave may also contribute to reduced retirement savings for women.
“The Pensions Commission will consider steps to improve pension outcomes for all, especially those groups we have identified at greater risk of under saving for retirement, including women. The Commission’s final report will be published in early 2027 and the Government will consider their recommendations carefully.”
According to the Institute for Government, the Pensions Commission – revived by Bell – will look not just at how to ensure people are saving – many more now are, largely thanks to automatic enrolment – but at how they can save enough to give themselves a decent retirement.
Pension contributions during unpaid leave or if you reduce hours
The Money Helper website says: “To avoid losing out on pension savings during unpaid leave, check if you’re able to pay extra contributions.
“This might mean you pay a small amount now to boost your pension for many years to come. If you have a partner and their pay is unaffected by your leave, you could consider using some of their income to pay into your pension.”
Should you return to the same salary once your family leave concludes, your pension contributions ought to carry on as usual. However, they will typically decrease if you reduce your working hours, or cease altogether should you not return to work.
Money Helper says that if you intend to work fewer hours, your pension benefits will generally accumulate more slowly than they did prior to your leave. This can have a significant impact on the level of retirement income you will have available in later life.
To help build sufficient funds for a comfortable retirement, you may want to consider raising your contribution rate. Should your employer offer contribution matching, you might also find they are willing to increase their payments too. The site adds: “If you do not go back to work after your leave, your workplace pension contributions will stop and your provider will continue managing your pension until you’re ready to take an income.
“Even a small break in contributions can make a big difference to your future retirement income, so always consider how you’ll continue saving. For example, setting up your own pension.”
