Despite an increasing number of women participating in the workforce, there are still significant differences between men and women in terms of superannuation balances at retirement – the so called gender retirement savings gap. As superannuation contributions are largely linked to employment or business income, those who have lower income, work part-time, or have time out of the workforce, will typically have a reduced capacity to accumulate superannuation benefits for retirement.
Women generally have lower average superannuation balances than men in all age groups. While the gap is initially quite small (just over $5,000 for those aged 25 -34), this gap widens significantly for those approaching retirement (aged between 55 – 64). In this pre-retirement age group, the average superannuation balance in 2013/14 was approximately $322,000 for men, compared with approximately $180,000 for women – a difference of nearly 45%.
The Impact of the Gender Pay Gap
There is a gender pay gap across all industries and a concentration of women in lower-paying occupations. The average female full-time earnings is 24% less than the average male full-time earnings based on total remuneration (which includes superannuation and bonuses). To illustrate the impact of the gender pay gap on retirement savings consider the following example.
Example 1: Sarah and Tim work continuously until they are 65. Sarah and Tim, both aged 30, work full time earning $73,000 and $90,000 respectively (the average salaries for females and males). Sarah has $25,000 in accumulated superannuation benefits, while Tom has a superannuation balance of $30,000 (average superannuation balances). Their respective employers each make mandatory superannuation guarantee contributions on their behalf and they both work continuously until age 65. If they do not make any other superannuation contributions, at retirement Sarah will have approximately $648,000 in superannuation benefits, while Tom will have more than $795,000 in superannuation.
Impact of Part-Time Work and Time Out of the Workforce
Women are also more likely than men to take periods out of work to bring up children or to care for older relatives, so their retirement balances are further disadvantaged. Also, more women take on part-time employment for some years in order to care for children.
Example 2: Sarah has 2 years out of work and 6 years part-time work to care for children. Sarah and Tim would like to start a family in the next few years. They plan to have two children and Sarah will take one year of maternity leave for each child. Her employer does not provide paid parental leave, but she will most likely be eligible for the Government’s Parental Leave Pay. When she returns to work, she expects that she would work part-time (three days per week) until her youngest child starts school. By taking two years out of the workforce and working part-time for six years, Sarah’s super balance is reduced to approximately $558,000 at retirement, $237,000 less than Tom’s superannuation balance at retirement.
Addressing the Retirement Savings Gap
This is a significant issue which is gaining national attention. Some of the changes that have been proposed include;
- increased focus on the gender pay gap,
- including superannuation in maternity leave entitlements,
- improved education and engagement with women about superannuation at a young age, and
- increasing the proportion of women into higher paid professions.
There are some steps that women can take now to improve their retirement outcomes.
- Salary Sacrifice into Superannuation
Salary sacrifice means asking your employer to contribute a portion of your before-tax salary into superannuation. The amount being salary sacrificed is taxed at a maximum of 15%, (or 30% if you earn more than $300,000 pa) in comparison to it being received as part of your take home pay where it would be included in your assessable income and taxed at your marginal tax rate. This will allow an individual to save in a more tax effective manner for retirement. Salary sacrificing $150 per month, commencing at age 30 and continuing until age 65, will result in a boost in retirement savings of over $50,000.
- Spousal Contributions and Contribution Splitting
A spouse contribution is when an individual makes a contribution into a spouse’s superannuation fund with after tax dollars, which means that no tax is deducted on entry into the fund. This can be done if the recipient spouse is under the age of 65 (or under the age of 70 if they meet the “Work Test”) and are an Australian tax payer. There is no age limit placed on the contributing spouse. Apart from the immediate benefit of boosting the superannuation balance of the recipient spouse, this strategy may offer further benefits for the couple down the track when accessing their superannuation at retirement.
A spouse contribution tax offset of up to $540 may be available to an individual who makes a contribution on behalf of their spouse if the recipient spouse’s total income is less than $13,800. This may be likely when one spouse is out of work while on parental leave and their total income is below this threshold.
Contribution splitting with your spouse is another strategy that can equalise superannuation balances. The recipient spouse must be less than preservation age, or less than 65 and not retired. Up to 85% of an individual’s before-tax contributions can be split with a spouse. Any contributions made to super are counted as part of the individual’s contribution limits, not the recipient spouse’s limits. Tax is deducted from the contributions before they are split with a spouse.
- Broader Financial Advice
Superannuation strategies are complex and must be tailored to an individual’s or couple’s broader financial picture. The earlier you commence working with your adviser to identify your short and long term financial goals, the better opportunity there will be to achieve them. Small changes now can have dramatic impact on your final superannuation balance. Women in particular are encouraged to seek financial advice early and be engaged with their retirement planning.
If you would like to explore these strategies please give us a call on (02) 9908 9888.
Kate is an Authorised Representative of Hillross Financial Services Limited (AR Number 1007833).