Pensions are a crucial part of planning for retirement. But how do pensions in the UK compare to the rest of the world and how can you make the most of your savings?
Australian research has compared the pension systems of 37 different countries. It assessed a range of different indicators, from savings through to operating costs. It looked at both social security systems and private sectors. The report aims to inform pension decisions. It notes that ageing populations are placing pressure on governments around the world.
So, how did the UK do?
After all the indicators are considered, the UK ranks 14th, earning a C+ grade. Whilst that’s not bad, it certainly suggested that there’s room for improvement. In fact, the research suggested that there are major risks and shortcomings that should be addressed to improve efficacy and long-term sustainability.
At the top of the table were the Netherlands and Denmark, both earning an A grade, followed by Australia with a B.
How can the UK pension system improve?
The good news is that the UK is already taking steps to improve its pension score. The UK’s overall score increased from 62.5 to 64.4 in the last year. This boost was partly due to auto-enrolment and increased minimum contribution levels. But, whilst a step in the right direction, the report identifies areas that could be improved. These include:
- Increasing the coverage of auto-enrolment: The majority of employees are now covered by auto-enrolment, it misses out some key groups. This includes the self-employed and some part-time workers.
- Raising minimum contribution levels: The current minimum contribution level is 8% of pensionable earnings. This is made up of employee and employer contributions. Whilst better than not saving into a pension, this falls below recommended saving levels to maintain lifestyles.
- Require retirees to take some of their pension as an income stream: Since 2015 retirees have had more freedom in how they access their pension. Should they choose to, they can withdraw it as a single lump sum, for example. However, the report recommends restoring the requirement to take part of retirement savings as an income stream.
- Raising household saving: The report also highlighted saving levels compared to household debt. Having debt in retirement can have a significant impact on lifestyle and income.
How do pensions in the Netherlands and Denmark differ?
Looking at the overall results of the research, the UK falls within the middle. But how does it compare to those that claim the A ranking?
- The Netherlands: Most employees in the Netherlands belong to occupational schemes that are Defined Benefit plans. Defined Benefit (DB) pension schemes offer a guaranteed income in retirement. This is often linked to years of service and working salary. This gives retirees certainty and means they take less responsibility for their pension income. There are DB schemes available in the UK but the number of these is falling. This is due to the cost of administering them rising as life expectancy rises. As a result, Defined Contribution (DC) schemes are more common in the UK. The income delivered from a DC pension depends on contribution levels and investment performance. Therefore, they offer less security in retirement.
- Denmark: Like the UK, most pensions in Denmark are DC schemes. However, there are some key differences. Everyone that works more than nine hours in Demark between the ages of 16 and 67 must contribute to the supplementary pension fund. This means coverage is larger than auto-enrolment in the UK. Employees can also not opt-out of ATP. Another crucial difference is that after saving through ATP, a pension is then paid in instalments once you reach retirement age. This provides a stable income throughout retirement. In contrast, UK pensioners can choose how and when they make pension withdrawals once they reach the age of 55.
Taking control of your pension
The UK might not come out top of the research. But that doesn’t mean that you can’t take steps to ensure you have the retirement you want. Setting out your goals and careful planning can help you secure the retirement you want. If you’re worried you’ll face a pension shortfall, among the steps to take are:
- Assess how far your current saving habits will go: Hopefully, you’re already paying into a pension or making other provisions for retirement. Assessing how this will add up between now and retirement is crucial. You should also look at the level of income it will deliver annually.
- Increasing contributions: If you’ve been auto-enrolled into a Workplace Pension, it’s likely you’re paying the minimum contribution levels. However, this often isn’t enough to achieve retirement dreams and you can increase contributions. In some cases, your employer will increase their contributions in line with yours.
- Understand your investments: If you have a DC pension scheme, your contributions will usually be invested. This helps your savings to grow. But how much risk should you take and what performance can you expect over the long term? Getting to grips with how your pension is invested can help you make decisions that are right for you.
Please get in touch if you’d like to discuss your current pension and retirement plans. We’d be happy to help you understand whether you’re on track and the lifestyle you can look forward to in retirement.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
Categorised in: Financial planning
This post was written by John Davies