In the United Kingdom, this 29% is just the beginning of the UK’s greatness. More support is offered for those without special equipment. The minimum annual income for an unentitled pensioner is around £18,000 ($22,349), for example (see www.entitledto.com to do the math), and that’s before we start adding benefits ‘health care 100% taxpayers’ money (Even if this month, the less about the NHS, the better). Add these up, and the UK’s average net replacement rate from the state comes to 40%.
However, to find the real joy of UK retirement income, we have to turn to private pensions supported by the state. Consider the latest figures on how much HMRC is giving away in pension tax relief: Last year, the figure topped £50 billion for the first time. This has risen to around £15 billion in just five years. Why? The UK has a long history of state-run pension funds outside of the well-defined pensions offered to civil servants. The Finance Act of 1921 allowed employers to set their pension contributions against their taxes and provided employee tax relief for all contributions at a flat tax rate. on their income, and allow all assets in the retirement account to grow tax-free.
This basic system still remains, but since 2013, it has been greatly improved by introducing vehicle registration, something few other countries have. If you are working, earn more than £10,000 and are over 22, at least 8% of your income will be put towards your pension – with all the tax benefits mentioned above. If the average earner works for 30 years and their pension pot grows by 5% a year, on average they will end up with around £250,000 when they retire. That won’t get you into luxury, but add to your state pension and you’ll earn around £23,000 – more than 70% of the average UK wage rather than 28%. (The UK government currently sets the net replacement rate at 58%.)
You could still argue that this is bad compared to some of the EU proposals, because you have to contribute to your pension out of your own pocket and not someone else’s. But there are a few other things to consider. The first is time. You have to work for 35 years to get the full UK pension. In France, it’s 42 years (and rising, if President Emmanuel Macron reaches 43). In Ireland it’s 40. In the Netherlands it’s 50. Note that you can also take your own pension (which most Europeans don’t) at 55. Most state pensions there in most countries it can only be taken when you are healthy. in your 60s.
The second is security. Most state pensions are pay-as-you-go, meaning the government does not own a pension fund. He just hopes that he will have the money to pay his promise from the general tax every year. This works well when most people work as tax payers. It works less well in the aging societies of the West, where the number of taxpayers in pensions is falling every year. In the UK, the car registration system means that a large part of your pension is not in the hope system. It has already been paid for by the government in advance. Both fully funded and in your name.
Look at the OECD numbers for this. As well as the much-cited figure for basic pensions, the OECD looks at the level of pension assets in each country and at those assets as a percentage of GDP. In the UK, this number is 117%. In Italy it is 9.7%, in France 11.1%, in Germany 7.8%, in Greece 1% (yes, really), in Portugal 11.4% and in Ireland 34%. In Australia, which started with vehicle registration before the UK, it was 146%. Seven OECD countries are responsible for more than 90% of their pension assets in absolute terms – the UK is second on that list after the US.
It is also worth noting that the UK numbers will increase. It was only in 2013 that registration started, so there is still a generation without a private pension. As it moves through the system, the average replacement rate and the savings-to-GDP ratio will continue to rise.
So here’s the big question: would you prefer a statutory pension for taxpayers to a state pension, at a time when public finances are in turmoil everywhere and the number of payers tax on each pensioner drops like a stone, or a semi-private system like the UK — where the government gives you money every year to put into your own designated retirement account that you can control immediately and you spend at 55?
If you choose the latter, would you still choose the tangible cash pile over the cash pile even if the newspaper tells you that the initial cash is lower? I think you are right. Every time. However, to get it all, you have to go in – not out. You need to work. And you have to stop, something most people do most of the time (this is an inertia-based system, after all).
But there has been a recent increase in the number of people choosing (1) because of the cost of living crisis. This is not right. First, you lose all your government and employers. Just like that. Second, you lose what you have grown. Third, it can all be lost in the long run. Going back – and losing part of your monthly salary again – will be difficult. Don’t take risks. If you do, you could end up outside of one of the best retirement systems in the world.
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(Revision of details of the pension system in Ireland in clause 7)
(1) According to the Department for Work and Pensions, the unemployment rate for new workers was 10.4% in August 2022 – up from 7.6% in January 2020.
This column does not necessarily reflect the views of the editorial board or Bloomberg LP and its owners.
Merryn Somerset Webb is a senior reporter for Bloomberg Opinion on personal finance and investing. Prior to that, he was editor-in-chief of MoneyWeek and editor-in-chief of the Financial Times.
More stories like this are available at bloomberg.com/opinion