EXCERPTS
A woman on average pay who takes a two year-long maternity break from work could see their pension pot slashed by £25,500, new figures show.
Mums can lessen the hit to their savings if they still pay pension contributions out of their lower maternity pay.
This forces employers to keep forking over their usual full top-ups - but mums still miss out on £13,900.
Women who take a five-year break to care for children and then return to work part-time stand to forfeit £100,000-plus of pension if they cancel contributions, according to the research from AJ Bell.
A mother stopping pension payments to save money is a common decision when starting a family, but the study shows that it is a false economy in the longer term.
A parent who is still earning cannot make contributions directly into their partner's pension.
However, it is worth sorting out the family budget so the one who has stopped work can still afford their payments and benefit from employer cash, suggests AJ Bell's personal finance analyst Laura Suter.
Dads don't get maternity pay under the same system as mums, but some employers do pay them if they take shared parental leave, in which case they should also maintain contributions to avoid a hit to their retirement savings, she says.
'Your pension might understandably be pretty low on your radar when you're pregnant and going on maternity leave, but the figures show the difference a small decision like choosing to cancel your contributions can have on your long-term financial plans,' says Suter.
'It may seem like a small amount of money in the short term but the compounding effect of investment returns over the long period until retirement means that the effect of stopping contributions snowballs.'
She explains how having career breaks to care for children can affect your pension and the various options available to protect it below.
How much can maternity leave hit your pension?
A woman earning the average annual salary from age 21 to 65 with a five percent pension contribution from their employer and five percent from them - including the Government's tax relief top-up - would end up with a £368,580 pension pot.
That's assuming four percent a year investment growth after charges, according to AJ Bell's calculations.
It's worth noting that under auto-enrolment minimum contributions, workers only get five percent in total paid into their pension at present, though this is due to rise to eight percent total next month.
However, many employers are more generous than this, hence the higher assumed payments in the study.
What if you take two year-long breaks? 'If you took a year-long career break at age 30 and another year-long break at age 33, with no pension contributions in that time, the pot would be £25,493 lower,' says AJ Bell's study.
'If the employer maintained their contribution during that time, at five percent of pre-maternity salary, the woman only misses out on £13,905 of pension pot.'
What if you take one five-year long break? 'If a woman takes a five-year career break at age 30, with no pension contributions in that time, and then returned to work on the average salary for their age, their pension pot would be £62,483 lower than with no career break.
'Clearly, they wouldn't have an employer during this time, but if they maintained their own pension contributions from when they were employed, they'd have £28,401 less than with no career break – or £34,082 more than if they made no contributions at all.'
What are the rules on maternity pay and leave?
The Government explains the current system, including fathers' eligibility for shared parental leave and pay, here.
What if you take two year-long career breaks and return to work part-time? 'A woman takes a year-long career break at age 30 and another year-long break at age 33, and then returns to work part-time, working three days a week until the age of 38 (so when the youngest child reached school age).
'We assume the same five percent contribution from employee and employer, but on the lower pro-rated salary, and in this scenario her pension pot would be £46,857 lower.'
What if you take one five-year long break and return to work part-time?
'If the same woman took a five-year career break at age 30, with no pension contributions in that time, and then returned to work part-time, working four days a week for the rest of her working life, on the average salary for their age (pro-rata), she would miss out on £100,845 of pension pot than if she took no career breaks and worked full time.'
What about fathers who take career breaks?
Men get higher average pay than women (see the box above) so taking career breaks to bring up a family potentially hits their pension pots even harder.
They have a different package of family rights from mothers, under the shared parental leave rules.
Suter says that, as with women, if men are paid for shared parental leave and keep contributing to a pension, their employer has to keep paying in too on their pre-parental leave salary.
However, she warns: 'I think for a lot of firms they offer shared parental leave but don't pay parents while they are on it.
'It could well be that a man on parental leave isn't actually earning anything, so wouldn't be contributing to his pension.'
How do you prevent parental career breaks reducing your pension pot?
'There's a real incentive to keep paying into your pension when you're on maternity leave because you could pay less than usual but your employer will pay the normal rate,' says Suter.
'If you keep up your pension contributions, they will be based on your maternity pay not your usual pay, but your employer will maintain their contributions on your usual, pre-maternity pay.
'Another option for those going on maternity leave is to get your partner to pay to maintain your full contributions throughout your leave.
'If you don't have the spare cash to keep contributing to your pension while on maternity leave, you could opt to ramp up the amount you put in when you return to work, to help make up some of the shortfall.'
Suter says that anyone who returns to work part-time after having children should also think about the impact this is going to have on their pension pot.
'If you return to work four days a week, and so are earning 20 percent less, but maintain your pension contributions at the same percentage rate, you'll see a 20 percent drop in the amount you put into your pension each month.
'On top of this, any employer matching offered will also be a smaller contribution.'
In this scenario, Suter suggests increase the percentage you put into your pension so that you're contributing that same amount in pounds and pence as when you worked full time.
She adds: 'Even if you're not earning money you're still allowed to put up to £2,880 into a pension each year, which will be topped up with another £720 from the Government.'