Mind the gap: ethnicity and retirement inequality

  • 19 November 2020
  • 15 minute read
  • The pension gap between white retirees and those from minority ethnic communities is nearly 25 per cent

  • This can be attributed to the often lower earnings during their working lives

  • And some cultural and communication issues need to be addressed

The fact that there is a sharply lower level of retirement income for many people from Britain’s minority ethnic communities is incontestable. Nor is it insignificant.

And as the Guardian reported in August 2020, minority ethnic people are more likely to retire later than white peers and have a lower weekly income, quoting research by the Centre for Ageing Better, Institute for Public Policy Research (IPPR) and University College London (UCL).

Back in February 2020 The People’s Pension released a report titled Measuring the ethnicity pensions gap and it found the difference between pension income in 2017/18 for those from minority ethnic communities was 24.4% lower than that of people from white backgrounds, or nearly a quarter. That amounted to £3,350 a year.

The gap is even greater from a gender perspective. The report found the average pension income of a female pensioner from a minority ethnic group was 51.4% lower than that of a white male pensioner.

Read more: How can we escape the gender pension gap?

The shortfall is not uniform across all groups

The People’s Pension report identified that three of the key underlying reasons for this gap are connected with the workplace.

Firstly, according to the Office for National Statistics as at September 2020, many people from minority ethnic backgrounds have lower-than-average rates of employment and this can lead to a reduced entitlement to the State Pension.

Secondly, and as reported by the Living Wage Foundation in June 2020, those from minority ethnic backgrounds in employment are generally in lower-paid roles which the People’s Pension reports has a cumulative effect on the workplace pensions. Lower pay means lower contributions from both the employee and, crucially, the employer.

Finally, the Government’s scheme to automatically enrol employees into a company pension, (known as auto enrolment) has a minimum salary below which employees do not qualify. This is called the “earnings trigger” and according to the Pensions Regulator it is £10,000 for the tax year 2020/21. As the Peoples Pension report points out it has an unintended consequence because minority ethnic employees are more heavily affected than their white colleagues.

Put simply, minority ethnic people in the UK are more likely to earn less than their white peers, so have less money to put aside, and are less likely to be a member of a workplace pension scheme.

However, disparities in earnings don’t tell the whole story.

It can be difficult for minority ethnic people to access financial advice

Increasingly, the financial services sector has been trying to address issues concerning approachability for, and communication with, people from minority ethnic communities. Money Advice and Education (Money a+e) is a social enterprise providing financial advice and education services to those from minority ethnic backgrounds and to those living in disadvantaged communities.

In April of this year it conducted a survey with the Institute for Global Prosperity and found 36% of those who had turned to Money a+e had previously found it “somewhat or very difficult” to get the financial advice and support they needed.

Reasons given often include negative experiences in the past, long waiting times, language barriers, and a sense that these organisations are not approachable.

In November 2019, the publication International Adviser turned the spotlight on the lack of minority ethnic representation in the financial advice sector. It declared: “Changes are needed and things need to be done, but how does the advice sector improve?”

But change is afoot. Two hundred financial services companies across the UK have come together to launch #100blackinterns. It is a commitment to improve diversity and inclusion in the industry. Schroders Personal Wealth is one of the signatories.

Better information and advice could be key

But if lower earnings, barriers to approachability and a lack of minority ethnic faces in the financial services sector play a major role in bringing about the pensions gap, may there not also be cultural forces at work?

We need to tread carefully here for fear of propagating racial stereotypes. But there are some clear cultural differences when it comes to pensions, with some communities emphasising personal assets such as property or a business.

One insight into the cultural obstacles comes from Cicely Ferguson, a semi-retired 59-year-old businesswomen living in south-east London.

She was interviewed by the Huffington Post in March of this year and she wasn’t in the least surprised by the extent of the ethnicity pension gap. “I’m from Antigua and none of my family and friends save for a pension – I suppose it’s a cultural thing” she said. “They are just not something people I know invest in – there just doesn’t seem to be that knowledge of pensions like there is over here in the UK. Pensions have some uncertainty for me. They are unchartered waters for my family and nearly all of my friends, but you know where you are with bricks and mortar.”

We also need to consider that sharia law, forbids some types of investment, and as FT Adviser reported in May 2020, many workplace schemes don’t offer suitable investments.

What can be done?

In 2017 the Department for Work and Pensions looked at the effect of lowering the “earnings trigger” to the minimum level at which National Insurance is paid. For the tax year 2020/21 this is £6,240. It discovered that doing this would bring an extra 1.2 million employees into automatic enrolment. Of these, 15% would be from ethnic minority groups, increasing the participation of minority ethnic employees by 50% from the current 10%.

As always, the best course for anyone concerned about their financial futures is to find out more. Find out how much income you are likely to need, find out how much State Pension you will be entitled to, and find out how you might be able to bridge any gap. Such as setting up a personal pension. Our articles Will I have enough to retire on and Have I saved enough to retire on? have more on this.

Pensions are a long-term investment. The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits, which isn’t guaranteed, and can go down as well as up. The benefits of your plan could fall below the amount(s) paid in.

Talking your situation through with an adviser could help you understand your situation and needs better. They could also walk you through the options available that could potentially help you reach your long-term financial goals.

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