How taking a career break can impact your future finances

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Many people take time away from work to raise children or look after other loved ones. And while doing this might be the right thing for you and your family, it can have a knock-on effect on your future finances. Career breaks are even one of the main reasons why women typically end up with less in their pension plans than men (known as the ‘gender pension gap’). But don’t worry – if you’re planning on taking a career break, we’ve got some tips you can try. 

Who’s taking time away from work – and what’s the result?

Anyone can take a career break. But women are more likely to take time away from work to look after family than men are. This partly explains why women end up with less money in retirement. Stats from the government show that women’s pension pots are worth 35% less than men’s when they reach age 55. 

So why does time away from work have such an impact? Well, let’s imagine that you pay into a pension plan that was set up by your employer. If you hand your notice in and stop working for a few years, your employer’s payments into your plan will stop, and so will yours. 

These years of missing pension payments can make a real difference. For example, someone who takes five years away from work could potentially have £27,000 less in their pension plan than someone who doesn’t take that time out.* 

Our Retirement Voice 2023 report found that only 30% of women are confident that they’re saving enough for a comfortable retirement, compared to 46% of men.

Thankfully, there are things you can do that could help you feel better about your money situation in future.

Tips to feel more confident about the future when taking a career break

1. Keep saving into a pension plan if you can

If you and your employer have agreed that you’ll return to the same job after your break, it’s worth asking if they can keep paying into the pension plan they set up for you and checking that you can still pay in too. 

If you’ve handed your notice in and you’re leaving the workforce completely, you could ask whether you can keep paying into the pension your employer set up. If that’s not an option, you could look into setting up a new plan.

If you go back to work part-time, your payments (and your employer's payments) into a pension plan will typically be lower than if you were full-time. But you may be able to change your payments in if you want to. If you earn less than £10,000, your employer doesn’t need to automatically set you up with a pension plan. But they will need to set a plan up for you if you ask them to. And as long as you earn over £6,240, they’ll need to pay in too. 

2. See what you can do for your State Pension

To get any State Pension, you normally need to have worked and paid National Insurance for a minimum number of years. 

But you might be able to build up your State Pension with something called National Insurance credits. You might get these if you’re claiming particular benefits, including child benefit. So be sure to claim that if you’ve taken a career break to look after children. 

If you’re not paying National Insurance but you have a partner who is, it’s worth making sure the child benefit claim is in your name. That way, you can get the National Insurance credits. Or they may be able to transfer credits to you.

Currently, if your partner earns £50,000 or more, your household will face the ‘High Income Child Benefit Charge’ – a tax charge that reduces the child benefit you get. If they earn £60,000 or more, the charge cancels out your child benefit altogether. But here’s the thing: even if the charge affects your household, it’s worth submitting a claim anyway for the National Insurance credits. Don’t forget, the thresholds for the tax charge are changing next month – read our article for more details.

If you’re taking a career break to care for a loved one who isn’t a child, you may still be able to get National Insurance credits – for example, if you’re getting Carer’s Allowance payments. 

You can check if you’re eligible for National Insurance credits and find out whether you need to apply for them on GOV.UK. 

There may be situations where you’re not paying National Insurance or getting National Insurance credits (for example, if you’re not working and not claiming benefits). So it could be worth looking into making voluntary National Insurance contributions. 

3. Check if you can get any other support

It could be worthwhile checking if you’re eligible for any other benefits or financial support if you’re taking time out of work to look after family. Any extra money you can get could help you out in the here and now. It might even free up some money for you to put away for your future. 

Are your finances on track?

If you’d like to understand how much you could have across your pension plans when you retire, you can check out our pension calculator.

If you’re a Standard Life customer, you can check the value of your plan online. If you want to change your payments, you may be able to do this online too. Keep in mind that if you’ve got a workplace plan with us, you may need to ask your employer how to change what you’re paying in. 

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*This scenario assumes both people begin working at age 22 with a salary of £30,000 per year and that they retire aged 68. It assumes they each pay 5% of their full salary into their workplace pension plan, while their employer pays 3%. The scenario assumes 3.5% salary growth per year, 1% annual investment cost and 5% investment growth per year. 

The difference between the two people is that one takes a five-year career break between the age of 30-35 and the other does not take a career break.  The person who takes a career break ends up with £208,000 in their pot, while the person who doesn’t take one ends up with £235,000. These figures have been adjusted to show the impact of inflation at an assumed rate of 2%.

 

The information here is based on our understanding in March 2024 and shouldn’t be taken as financial advice.

A pension is an investment. Its value can go down as well as up and could be worth less than was paid in.

Your own personal circumstances, including where you live in the UK, will have an impact on the tax you pay. Laws and tax rules may change in the future.

Standard Life accepts no responsibility for information in external websites. These are provided for general information.