I’m expecting a baby in a few months and would like to continue making pension contributions during my maternity leave. I am currently paying above the minimum contribution level to receive higher adjusted contributions from my employer.
I asked my human resources department how to keep the payments going while on vacation. I have been told that I will be paid in full for the first 20 weeks and normal premiums will be deducted.
If I transition to Statutory Maternity Allowance, my contributions will continue based on the lower salary and my employer’s will continue on a full salary basis, although I cannot afford to forego salary during this time.
Plan ahead: How can I make the best use of my pension contributions during maternity leave?
If I then take unpaid maternity leave, HR tells me that I will not contribute and neither will my employer, but it is suggested that I consider increasing my contributions for a time when I return to work to compensate.
I’m not really satisfied with this answer, because I would prefer to continue paying my currently higher contributions during all phases of my parental leave and have my employer pay them in full.
Am I entitled to it? If I say I want to pay the usual amount even while on unpaid maternity leave, does that mean my employer is also required to pay my full payments?
If not, and I’ll have to do that when I go back to full-time work, would it be better to put a lump sum into my pension or increase my contributions for a period as HR suggested?
This is Money’s Tanya Jefferies responds: Many women start off well with retirement planning, but fall behind when they have children.
It is therefore sensible to fill any gaps left by the leave immediately or as soon as possible, otherwise you may never make up for it.
Even short pauses in saving for retirement can make a difference, especially at a young age, as you not only lose the sums, but the sums accruing immensely valuable compound growth of your retirement investments that builds up over time.
If you are in a partnership, married or have a registered partner, it makes sense to work together to maximize both pensions throughout your working life, including during maternity leave.
For example, if you are temporarily unable to pay contributions during maternity leave, but your partner has the money to help you, ask them to do so, as you will both benefit in the long term.
This also applies to the production full use of the adjusted contributions of your employerslike you’re doing right now.
This is free money – plus extra tax breaks from the government – that you wouldn’t otherwise get in your pension.
It makes sense for both partners to reach out to each other and contribute to retirement if needed, because you’ll end up enjoying a richer retirement together.
And if you sadly split up but your pension pots aren’t too unbalanced – as has been the case in the past between men and women, largely due to pay differentials and the latter doing unpaid care work – there will be less anger and hostility towards them to share .
Even so, the maternity leave system can get complicated for even the best of intentions like you when it comes to pension contributions.
We asked a financial expert to explain how to calculate how much you could lose and how best to fill the gap.
Laura Suter, Head of Personal Finance at AJ Bell, responds: First, well done thinking about it.
Women tend to have smaller pension incomes than men, partly because they are more likely to take career breaks when they have children.
This leaves them with a large gap in their pension contributions during this time. Thank you for planning your maternity leave in advance.
What your employer told you is correct and unfortunately the system is not very flexible.
Your employer continues to pay his previous contribution during your maternity until you go into the period without pay.
After the first 20 weeks, however, your personal contributions will be based on your lower salary – and this is where your personal pension gap begins.
How big is the financial hole you need to fill?
Your first task is to calculate your pension gap. It gets pretty complicated, but it’s possible.
Laura Suter: Your employer will continue to pay his previous contribution through your maternity until you enter the zero-wage phase
You need to find out how long your maternity leave will be – if you’ve already discussed this with HR they should be able to give you a breakdown of how long you’ll be fully paid, legally paid and unpaid.
Then you should check your most recent pension statement and see how much you and your employer contribute each month.
You can disregard the first 20 weeks of your leave as you say you will be paid in full and neither you nor your employer will reduce contributions.
In the next step, you determine how much of your remaining vacation time is allotted to statutory maternity pay.
During this time, your employer will continue to pay full contributions for you, but your own contribution will be based on your statutory maternity benefit.
You have to calculate how high that is and what pension gap it creates.
And finally, you have to calculate how long your last unpaid leave will be, where you will not receive pension contributions and what the pension gap will be during this period.
What is the best approach to catch up on the missing posts?
You have three options to fill the gap: increase your pension contributions before maternity leave begins; increase them when you return to work; or a combination of both.
Some companies only allow you to change your pension contribution rate once a year or at certain life events — and the birth of a child usually is one. Depending on their rules, which may force you to increase contributions only when you return to work.
They also ask whether it is better to deposit it as a lump sum or as an increased monthly contribution.
This depends on a few factors. First: your employer’s matching rules. If you’re not currently exhausting all employer adjustments, you’d better increase your monthly contribution because your employer will also add more to your pension.
The next factor is whether you’re contributing to your pension by forgoing wages.
When you do this, your pension contributions are effectively collected before taxes or Social Security are paid, saving you more money than just paying a lump sum and claiming the tax back.
What other steps can you take to receive your pension?
There are a few other things to consider. Because maternity leave is vacation time and public holidays, many women take it at the end of their leave to cut down on unpaid time.
During this time, you are actually able to work again for payroll purposes, so your pension contributions will return to normal. This can help reduce the pension gap.
Second, if you decide to work part-time or fewer hours than you used to, it will have a big impact on your pension contributions.
If you want to receive your pension, you must increase your percentage contribution significantly to compensate for your lower salary.
TOP SIPPS FOR DIY PENSION INVESTORS
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Can I continue to pay into my pension while on maternity leave?
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