The Department for Work and Pensions (DWP) has provided an important update concerning women and pension contributions, as it prepares to review recommendations on pension reform.
A particular focus is being placed on how pension contributions are affected during periods of family leave. Typically, when a woman takes paid family leave, both she and her employer continue to contribute to her workplace pension.
Statutory Maternity Pay, paid by the employer, usually covers up to 39 weeks - around nine months. Many employers offer additional paid leave beyond this period, so it is advisable for employees to consult their workplace family leave policies for specific details.
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During paid maternity, paternity, or adoption leave, pension contributions usually continue as normal for at least 39 weeks. However, should an employee choose to take unpaid leave, contributions generally cease. This situation typically arises between weeks 40 and 52 of maternity or adoption leave, as entitlement to paid benefits like Statutory Maternity Pay ends at week 39.
For those who do not qualify for paid leave, employer pension contributions commonly persist for the first 26 weeks (approximately six months). This remains the case even if the employee is receiving Maternity Allowance, a government benefit rather than one paid by the employer.
According to guidance from the People’s Pension, employers make pension contributions based on the employee’s pay before the commencement of maternity leave, while the employee’s contributions are based on the actual pay received, such as Statutory Maternity Pay. Consequently, if an employee’s earnings fall below the lower earnings threshold, their contributions could be nil under the qualifying earnings basis.
The significance of this issue emerged following a query from Rachel Gilmour, Liberal Democrat MP for Tiverton and Minehead, who asked the DWP about the potential impact of reduced pension contributions during maternity leave on women’s retirement savings.
Responding, Torsten Bell, Parliamentary Secretary at HM Treasury, acknowledged progress in workplace pension participation among women due to Automatic Enrolment and reforms to the State Pension. However, he noted that substantial disparities between men and women persist, partly attributable to structural labour market inequalities and periods of reduced pay during maternity leave, which may reduce women’s retirement savings.
Mr Bell confirmed that the Pensions Commission would examine strategies to enhance pension outcomes, especially for groups at risk of under-saving, including women. The Commission’s final report is expected in early 2027, and the government plans to consider its recommendations carefully.
The revived Pensions Commission will also focus on ensuring that people not only participate in pension saving, which has improved significantly, but also accumulate sufficient funds for a comfortable retirement.
The Money Helper website advises individuals to consider making additional pension contributions during unpaid leave periods to offset potential losses. For example, paying a modest amount now could substantially boost retirement savings over time. Couples may also explore the option of using a partner’s unaffected income to contribute.
Upon returning to work at the same salary following family leave, pension contributions should recommence at previous levels. However, contributions will usually decrease if working hours are reduced or cease entirely if the employee does not return to work.
Money Helper cautions that working fewer hours post-leave may slow the accumulation of pension benefits, impacting future retirement income. To counter this, increasing contribution rates could be beneficial, and some employers may agree to raise matching contributions.
If an individual does not return to work after family leave, workplace pension contributions will stop, but the pension provider will continue to manage the existing pension until retirement. Since even brief gaps in contributions can affect long-term pension income significantly, anyone facing such breaks should consider alternative saving methods, such as setting up a personal pension.