Tax treatment depends on your circumstances and is subject to change
In pure money terms, the rate of the UK pension has a reputation of falling short in comparison with other countries. Especially our European neighbours. For instance, while retirees in Britain were receiving a State Pension of between £125 and £160, France was offering between £130 and £340, and Spain was offering between £155 and £5351.
But can you compare pensions on their rates alone? Probably not, as each nation expects its residents to contribute different amounts in unique ways. The overall economy and living standards will also impact rates, as well as benefits from each pension. For instance, Liz Truss has promised to reinstate the triple lock system to the UK pensions which means it could very soon reach £200 a week with current inflation2.
The State Pension has been marginalised in the UK in the 21st century. Onus is placed on contributing to a private pension while the State Pension acts more like a foundation income for retirement. However, many British citizens rely on the State Pension as their main source of income in post-work years and consider its in-built structures (such as keeping up with inflation) a great benefit.
Either way the current thought on the UK State Pension is it’s not keeping up with similar pensions of European, or even global, countries of relative size. In many ways this may be so, but comparing like for like can be a complex matter simply because all mandatory pensions tend to have different systems (and hence different benefits and problems) on top of unique national structures and regulations. In this article we look at how some of those systems work in other countries.
Contributing to a State Pension fund is compulsory in France. There are two parts:
Both parts are intrinsically linked to employment and Social Security which means contributions are taken at source in a mandatory fashion. Though the French State Pension reflects the UK pension in many ways, those people contributing to a pension fund lack the freedom to save in supplementary funds of their own choice.
French people can start claiming their full State Pension after 42 years of work, or from the age of 62 – whichever comes first.
However, the French encourage people to continue working longer by offering an increase for every quarter year worked.
It is funded by both the employee and employer contributions. When the employee retires, 50% of the average annual earnings can be drawn from the fund or €39,732 a year.
As in the UK, there are three types of pension fund:
However, German residents tend to rely on the State Pension above anything else because it is so generous. The percentage taken at source for the State Pension is approximately 18%. This sounds high but it’s made up equally of employee and employer contributions (around 9% each). Length of service, amount in contributions, age and income will determine their final retirement pay out.
Pension age in Germany is 65, but, as in the UK, this figure is rising and is expected to increase to 67 by 2029. You can opt for early retirement when you have completed 33 years of work. On average, the rate you will receive is likely to be 50% of your employment income.
The State Pension is the main source of income for most retirees. People of Spain can also pay into a private pension or an occupational pension as in the UK. The amount the Spanish government spends on its State Pension is relatively high. Whereas the global average is 8.2% of a country’s GDP, Spain spends approximately 11.4% on its State Pension per year. The Spanish government continually encourages people to take out private pensions so there is not so much reliance on the State Pension.
On average, the rate of pension a Spanish person can expect to receive is 81% of their gross annual income. However, even though contributions are again shared between employer and employee, contributions are not equal. On average, employers will contribute 23%, while employees contribute approximately 5%. An individual can withdraw their retirement fund after 33 years of work.
The State Pension in Denmark works in a slightly different way. Like many countries it comprises two parts – a basic amount and a supplement. The supplement rate is dependent upon whether the recipient is single or part of a couple. Also, the individual’s basic rate may be reduced if his/her employment income exceeded a specific amount.
The supplement part of the State Pension is means-tested and considers income from all sources to the household. Claimants must have been a resident in Denmark for forty years. The overall rate on average appears generous: £395 per week for a single person and £295 per person living as a couple.
In North America, the State Pension is referred to as Social Security. A US citizen can expect to receive approximately 49% of their working wage at retirement. This fund is made up from taxes placed on employees and employers. In May 2019, the average monthly state benefit for retired workers was equivalent to approximately £1100.
Any US citizen born before 1960 can retire at 65 – but, as with many countries across the globe, this age is increasing. Some retirement plans offer the possibility of retiring at 62 but claimants will lose a percentage of their pension rate per year on average.
Australia’s Age Pension is means-tested and funded by taxes. On average an Australian retiree will receive 43% of their salary. At the moment, residents can still claim their retirement package from 65 but from 2023 this will rise to 67. Employees are also required to pay 9.5% of their gross earnings into a retirement fund known as a superannuation guarantee.
However, assets and income will also be taken into account. For the full Age Pension, you need to have assets of less than approximately £160,000 (in 2022 exchange rates) if you are a homeowner, or approximately £280,000 if not. You will also be required to take an income test and evidence you are receiving less than £106 per fortnight.
While all national State Pensions seem to have varying systems and benefits, they tend to have the same goals which are restricted by internal economies and the onus placed on needs. For instance, in 2015, the UK spent 2% on retirement costs while Germany and Spain spent 9% and 7% respectively. Clearly to compare retirement pensions across the world, it’s too simplistic to look at rates alone.
2https://www.thesun.co.uk/money/19801730/state-pension-increase-cost-living-retirement/
We can help you to make the best possible decisions when it comes to your pension.
Taking pension money early is not right for everyone as it will leave you worse off in retirement. Also, tax treatment depends on your circumstances and is subject to change. That’s why it makes sense to get help from a regulated specialist.
