The downside of the UK State Pension?
Jun 23rd 2006, 11:02 pm
#1
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Thread Starter
Joined: Jun 2005
Posts: 9,316
The downside of the UK State Pension.
I've noticed that a lot of people moan about the Aus old age pension because it is means tested. However in comparing it to the UK state pension people usually omit to mention that the UK state pension is contribution tested and that for higher-earners (who would not get the Aus pension) the contributions are much higher than what they get back in benefits.
I think most people forget about (or are unaware of) the UK Employer's NI contribution which (along with the employee's NI contribution) is used to pay for the state pension, SERPS (or contracted out pension) and the NHS. To most people this is a hidden tax (and therefore does not exist
)
The following figures shows the bigger picture for a medium earner. For higher earners in Aus the picture becomes rosier. Lower earners in Aus will are likely to get the Aus old age pension (approx 2/3 of retired people do). Mostly I think it's a case of swings and roundabouts or there or thereabouts.
The UK contributions based system is only a benefit to people on less than £23k a year and those who pay a reduced contributions rate (e.g. self-employed).
Other things to note:
- The income on the Aus super is taxed at 15% and CGT at 10%.
- The whole of the Aus super can be withdrawn at the end - tax free.
- You do not have to buy an annuity in Aus - so the money is yours and you can pass it on to your kids.
- The UK pension no longer meets the minimum pension guarantee and the difference is means-tested.
If you think I've got any of the figures wrong then please tell me (nicely). Otherwise feel free to discuss.
Notes:
(1) Figures are shown in £s. An exchange rate of 2.5 has been used for $ calculations.
(2) Aus tax calculation does not include 1% medicare levy (note levy) as the employee has medical insurance in this example.
(3) Based on $2500 a year. This should buy sufficent cover to make up the deficit with NHS cover.
(4) What the employee takes home (including deduction for medical in Aus case).
(5) What the employer pays on top of your salary whether you're aware of this or not.
(6) What goes into the employee's private pension pot. In the UK example it is assumed that the employee has contracted out. In the Aus case 15% tax has been taken off the employer's contribution.
(7) The equivalent value of the UK state pension. This is the amount that would have to be put into a private pension to match the state pension if it did not exist. Calculated using this calculator http://www.pensioncalculator.org.uk/pages/home.php#one
(8) What the employee actually gets (i.e. take home pay and pension)
I think most people forget about (or are unaware of) the UK Employer's NI contribution which (along with the employee's NI contribution) is used to pay for the state pension, SERPS (or contracted out pension) and the NHS. To most people this is a hidden tax (and therefore does not exist
)The following figures shows the bigger picture for a medium earner. For higher earners in Aus the picture becomes rosier. Lower earners in Aus will are likely to get the Aus old age pension (approx 2/3 of retired people do). Mostly I think it's a case of swings and roundabouts or there or thereabouts.
The UK contributions based system is only a benefit to people on less than £23k a year and those who pay a reduced contributions rate (e.g. self-employed).
Other things to note:
- The income on the Aus super is taxed at 15% and CGT at 10%.
- The whole of the Aus super can be withdrawn at the end - tax free.
- You do not have to buy an annuity in Aus - so the money is yours and you can pass it on to your kids.
- The UK pension no longer meets the minimum pension guarantee and the difference is means-tested.
If you think I've got any of the figures wrong then please tell me (nicely). Otherwise feel free to discuss.
Code:
UK Aus Diff Pay(1) £30,000 £30,000 Taxes(2) £8,054 £7,513 £541 Medical(3) £1,042 -£1,042 PAY AFTER DEDUCTIONS(4) £21,946 £21,446 £500 Employer contributions(5) £3,281 £2,700 £581 Private Pension(6) £513 £2,295 -£1,782 State(7) £750 £750 TOTAL PAID BY EMPLOYER £33,281 £32,700 £581 TOTAL COLLECTED BY GOV £11,335 £7,918 £3,417 TOTAL EMPLOYEE COMPO(8) £23,209 £23,741 -£532
(1) Figures are shown in £s. An exchange rate of 2.5 has been used for $ calculations.
(2) Aus tax calculation does not include 1% medicare levy (note levy) as the employee has medical insurance in this example.
(3) Based on $2500 a year. This should buy sufficent cover to make up the deficit with NHS cover.
(4) What the employee takes home (including deduction for medical in Aus case).
(5) What the employer pays on top of your salary whether you're aware of this or not.
(6) What goes into the employee's private pension pot. In the UK example it is assumed that the employee has contracted out. In the Aus case 15% tax has been taken off the employer's contribution.
(7) The equivalent value of the UK state pension. This is the amount that would have to be put into a private pension to match the state pension if it did not exist. Calculated using this calculator http://www.pensioncalculator.org.uk/pages/home.php#one
(8) What the employee actually gets (i.e. take home pay and pension)
Last edited by MartinLuther; Jun 23rd 2006 at 11:33 pm.
Jun 24th 2006, 5:11 am
#2
Fighting my corner
Joined: Aug 2005
Location: Adelaide, South Australia
Posts: 11,948
Re: The downside of the UK State Pension.
Originally Posted by MartinLuther
I've noticed that a lot of people moan about the Aus old age pension because it is means tested. However in comparing it to the UK state pension people usually omit to mention that the UK state pension is contribution tested and that for higher-earners (who would not get the Aus pension) the contributions are much higher than what they get back in benefits.
I think most people forget about (or are unaware of) the UK Employer's NI contribution which (along with the employee's NI contribution) is used to pay for the state pension, SERPS (or contracted out pension) and the NHS. To most people this is a hidden tax (and therefore does not exist )
The following figures shows the bigger picture for a medium earner. For higher earners in Aus the picture becomes rosier. Lower earners in Aus will are likely to get the Aus old age pension (approx 2/3 of retired people do). Mostly I think it's a case of swings and roundabouts or there or thereabouts.
The UK contributions based system is only a benefit to people on less than £23k a year and those who pay a reduced contributions rate (e.g. self-employed).
Other things to note:
- The income on the Aus super is taxed at 15% and CGT at 10%.
- The whole of the Aus super can be withdrawn at the end - tax free.
- You do not have to buy an annuity in Aus - so the money is yours and you can pass it on to your kids.
- The UK pension no longer meets the minimum pension guarantee and the difference is means-tested.
If you think I've got any of the figures wrong then please tell me (nicely). Otherwise feel free to discuss.
Notes:
(1) Figures are shown in £s. An exchange rate of 2.5 has been used for $ calculations.
(2) Aus tax calculation does not include 1% medicare levy (note levy) as the employee has medical insurance in this example.
(3) Based on $2500 a year. This should buy sufficent cover to make up the deficit with NHS cover.
(4) What the employee takes home (including deduction for medical in Aus case).
(5) What the employer pays on top of your salary whether you're aware of this or not.
(6) What goes into the employee's private pension pot. In the UK example it is assumed that the employee has contracted out. In the Aus case 15% tax has been taken off the employer's contribution.
(7) The equivalent value of the UK state pension. This is the amount that would have to be put into a private pension to match the state pension if it did not exist. Calculated using this calculator http://www.pensioncalculator.org.uk/pages/home.php#one
(8) What the employee actually gets (i.e. take home pay and pension)
I think most people forget about (or are unaware of) the UK Employer's NI contribution which (along with the employee's NI contribution) is used to pay for the state pension, SERPS (or contracted out pension) and the NHS. To most people this is a hidden tax (and therefore does not exist
)The following figures shows the bigger picture for a medium earner. For higher earners in Aus the picture becomes rosier. Lower earners in Aus will are likely to get the Aus old age pension (approx 2/3 of retired people do). Mostly I think it's a case of swings and roundabouts or there or thereabouts.
The UK contributions based system is only a benefit to people on less than £23k a year and those who pay a reduced contributions rate (e.g. self-employed).
Other things to note:
- The income on the Aus super is taxed at 15% and CGT at 10%.
- The whole of the Aus super can be withdrawn at the end - tax free.
- You do not have to buy an annuity in Aus - so the money is yours and you can pass it on to your kids.
- The UK pension no longer meets the minimum pension guarantee and the difference is means-tested.
If you think I've got any of the figures wrong then please tell me (nicely). Otherwise feel free to discuss.
Code:
UK Aus Diff Pay(1) £30,000 £30,000 Taxes(2) £8,054 £7,513 £541 Medical(3) £1,042 -£1,042 PAY AFTER DEDUCTIONS(4) £21,946 £21,446 £500 Employer contributions(5) £3,281 £2,700 £581 Private Pension(6) £513 £2,295 -£1,782 State(7) £750 £750 TOTAL PAID BY EMPLOYER £33,281 £32,700 £581 TOTAL COLLECTED BY GOV £11,335 £7,918 £3,417 TOTAL EMPLOYEE COMPO(8) £23,209 £23,741 -£532
(1) Figures are shown in £s. An exchange rate of 2.5 has been used for $ calculations.
(2) Aus tax calculation does not include 1% medicare levy (note levy) as the employee has medical insurance in this example.
(3) Based on $2500 a year. This should buy sufficent cover to make up the deficit with NHS cover.
(4) What the employee takes home (including deduction for medical in Aus case).
(5) What the employer pays on top of your salary whether you're aware of this or not.
(6) What goes into the employee's private pension pot. In the UK example it is assumed that the employee has contracted out. In the Aus case 15% tax has been taken off the employer's contribution.
(7) The equivalent value of the UK state pension. This is the amount that would have to be put into a private pension to match the state pension if it did not exist. Calculated using this calculator http://www.pensioncalculator.org.uk/pages/home.php#one
(8) What the employee actually gets (i.e. take home pay and pension)
Jun 24th 2006, 11:20 am
#3
BE Enthusiast
Joined: Jan 2006
Posts: 413
Re: The downside of the UK State Pension.
Originally Posted by MartinLuther
I've noticed that a lot of people moan about the Aus old age pension because it is means tested. However in comparing it to the UK state pension people usually omit to mention that the UK state pension is contribution tested and that for higher-earners (who would not get the Aus pension) the contributions are much higher than what they get back in benefits.
I think most people forget about (or are unaware of) the UK Employer's NI contribution which (along with the employee's NI contribution) is used to pay for the state pension, SERPS (or contracted out pension) and the NHS. To most people this is a hidden tax (and therefore does not exist )
The following figures shows the bigger picture for a medium earner. For higher earners in Aus the picture becomes rosier. Lower earners in Aus will are likely to get the Aus old age pension (approx 2/3 of retired people do). Mostly I think it's a case of swings and roundabouts or there or thereabouts.
The UK contributions based system is only a benefit to people on less than £23k a year and those who pay a reduced contributions rate (e.g. self-employed).
Other things to note:
- The income on the Aus super is taxed at 15% and CGT at 10%.
- The whole of the Aus super can be withdrawn at the end - tax free.
- You do not have to buy an annuity in Aus - so the money is yours and you can pass it on to your kids.
- The UK pension no longer meets the minimum pension guarantee and the difference is means-tested.
If you think I've got any of the figures wrong then please tell me (nicely). Otherwise feel free to discuss.
Notes:
(1) Figures are shown in £s. An exchange rate of 2.5 has been used for $ calculations.
(2) Aus tax calculation does not include 1% medicare levy (note levy) as the employee has medical insurance in this example.
(3) Based on $2500 a year. This should buy sufficent cover to make up the deficit with NHS cover.
(4) What the employee takes home (including deduction for medical in Aus case).
(5) What the employer pays on top of your salary whether you're aware of this or not.
(6) What goes into the employee's private pension pot. In the UK example it is assumed that the employee has contracted out. In the Aus case 15% tax has been taken off the employer's contribution.
(7) The equivalent value of the UK state pension. This is the amount that would have to be put into a private pension to match the state pension if it did not exist. Calculated using this calculator http://www.pensioncalculator.org.uk/pages/home.php#one
(8) What the employee actually gets (i.e. take home pay and pension)
I think most people forget about (or are unaware of) the UK Employer's NI contribution which (along with the employee's NI contribution) is used to pay for the state pension, SERPS (or contracted out pension) and the NHS. To most people this is a hidden tax (and therefore does not exist
)The following figures shows the bigger picture for a medium earner. For higher earners in Aus the picture becomes rosier. Lower earners in Aus will are likely to get the Aus old age pension (approx 2/3 of retired people do). Mostly I think it's a case of swings and roundabouts or there or thereabouts.
The UK contributions based system is only a benefit to people on less than £23k a year and those who pay a reduced contributions rate (e.g. self-employed).
Other things to note:
- The income on the Aus super is taxed at 15% and CGT at 10%.
- The whole of the Aus super can be withdrawn at the end - tax free.
- You do not have to buy an annuity in Aus - so the money is yours and you can pass it on to your kids.
- The UK pension no longer meets the minimum pension guarantee and the difference is means-tested.
If you think I've got any of the figures wrong then please tell me (nicely). Otherwise feel free to discuss.
Code:
UK Aus Diff Pay(1) £30,000 £30,000 Taxes(2) £8,054 £7,513 £541 Medical(3) £1,042 -£1,042 PAY AFTER DEDUCTIONS(4) £21,946 £21,446 £500 Employer contributions(5) £3,281 £2,700 £581 Private Pension(6) £513 £2,295 -£1,782 State(7) £750 £750 TOTAL PAID BY EMPLOYER £33,281 £32,700 £581 TOTAL COLLECTED BY GOV £11,335 £7,918 £3,417 TOTAL EMPLOYEE COMPO(8) £23,209 £23,741 -£532
(1) Figures are shown in £s. An exchange rate of 2.5 has been used for $ calculations.
(2) Aus tax calculation does not include 1% medicare levy (note levy) as the employee has medical insurance in this example.
(3) Based on $2500 a year. This should buy sufficent cover to make up the deficit with NHS cover.
(4) What the employee takes home (including deduction for medical in Aus case).
(5) What the employer pays on top of your salary whether you're aware of this or not.
(6) What goes into the employee's private pension pot. In the UK example it is assumed that the employee has contracted out. In the Aus case 15% tax has been taken off the employer's contribution.
(7) The equivalent value of the UK state pension. This is the amount that would have to be put into a private pension to match the state pension if it did not exist. Calculated using this calculator http://www.pensioncalculator.org.uk/pages/home.php#one
(8) What the employee actually gets (i.e. take home pay and pension)
If you work on the super system 9% of a working life of 45 yrs is in round numbers 4 yrs,this is taxed at 15%,thus the employer contribution is 3.5 yrs,again round numbers.The actuarial calculations I have seen and done for myself give a retirement target of 4 yrs wages in todays dollars,thus you would retire on around $220,000.The aim of the system is to reduce social security costs,in future the govt may say spend your own money at a given rate and then come back to us once it has gone,as they do with unemployment benefit now.They can now reduce your pension through the means testing system of assets/income tests.say they reduce your income from the $22,000 approx (married pension now) to $17,000 and you make it up to $30,000 from your own money,you do not have a good standard of living.On a projected pensioner age population of 4 million the saving of $5000 per year per couple cuts the social security bill by $20 billion a year.
I would advise start and become financially aware and look after yourself and family.I am strongly biased against the super system.
Jun 24th 2006, 10:02 pm
#4
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Thread Starter
Joined: Jun 2005
Posts: 9,316
Re: The downside of the UK State Pension.
Originally Posted by geordie downunder
As far as I can see there is no downside to the UK pension,if you have the 44yrs contributions you get it ,no matter how wealthy you are.Here the means testing is a bad thing,it seems to have produced two classes of people,the ones that think why bother as the govt reduces the pension if you try to get ahead,and the ones that think saving a small amount in the super system will produce $millions on retirement.Neither of them provide a good income for old people .
If you work on the super system 9% of a working life of 45 yrs is in round numbers 4 yrs,this is taxed at 15%,thus the employer contribution is 3.5 yrs,again round numbers.The actuarial calculations I have seen and done for myself give a retirement target of 4 yrs wages in todays dollars,thus you would retire on around $220,000.The aim of the system is to reduce social security costs,in future the govt may say spend your own money at a given rate and then come back to us once it has gone,as they do with unemployment benefit now.They can now reduce your pension through the means testing system of assets/income tests.say they reduce your income from the $22,000 approx (married pension now) to $17,000 and you make it up to $30,000 from your own money,you do not have a good standard of living.On a projected pensioner age population of 4 million the saving of $5000 per year per couple cuts the social security bill by $20 billion a year.
I would advise start and become financially aware and look after yourself and family.I am strongly biased against the super system.
If you work on the super system 9% of a working life of 45 yrs is in round numbers 4 yrs,this is taxed at 15%,thus the employer contribution is 3.5 yrs,again round numbers.The actuarial calculations I have seen and done for myself give a retirement target of 4 yrs wages in todays dollars,thus you would retire on around $220,000.The aim of the system is to reduce social security costs,in future the govt may say spend your own money at a given rate and then come back to us once it has gone,as they do with unemployment benefit now.They can now reduce your pension through the means testing system of assets/income tests.say they reduce your income from the $22,000 approx (married pension now) to $17,000 and you make it up to $30,000 from your own money,you do not have a good standard of living.On a projected pensioner age population of 4 million the saving of $5000 per year per couple cuts the social security bill by $20 billion a year.
I would advise start and become financially aware and look after yourself and family.I am strongly biased against the super system.
Downside 1 - Most of the UK contributions goes into the UK government's pot. If I stayed in the UK and completed my 44 years, the government would give at least 20 years and probably more like 25 years of my contributions to other people. The 15% that the Aus government forces me to share, pales in comparison to this.
Downside 2 - Most of the UK contributions goes into the UK government's pot. (Yes - I know that this sounds like the last one - but hang on.) When I die this money is given to other people. In Aus, if I die, the money in my super/pension goes to my estate (and then my family).
Downside 3 - Those UK contributions that can be diverted into my personal pot have to buy an annuity. When I die the annuity company shares this money with other people. My family gets nothing.
I don't think it is any secret that the Aus government has introduced the super system to reduce social security costs. They are quite clear about that and I think it is a great idea. It is also no secret that the "Future Fund" is also being introduced to reduce the cost of future pension requirements. The reduction in pension payments for those that have built up a super is not as dramatic as you suggest. The payment is phased out at 40c in every $. This means that you will be better off if you build super than if you don't. I agree that some people don't understand this and take the attitude "why bother" - that doesn't make them right. In the mean time the UK government has been reducing the payout (in real terms) of the contributory pension and has been topping it up to the minimum pension guarantee using a means-tested pension. In this case people will lose out £ for £ if they save for their pension independently. Coincidentally, the UK government has also increased the rate of the employer’s contribution whilst making these changes.
It's not clear what your penultimate sentence is saying, but if you’re advising me to become more financially aware then this statement is condescending and patronising. I am financial aware enough to know that being forced to share 15% of my pension contributions is much more beneficial to my family than being forced to share 50-60% of it. It is also more reasonable.
Jun 25th 2006, 1:34 am
#5
Forum Regular
Joined: Apr 2004
Posts: 72
Re: The downside of the UK State Pension?
Geordie Downunder says:-
They can now reduce your pension through the means testing system of assets/income tests.say they reduce your income from the $22,000 approx (married pension now) to $17,000 and you make it up to $30,000 from your own money,you do not have a good standard of living
A puzzling statement because if you do not have a good standard of living on $30,000 how can you have one on $22,000?
Surely it is better to get the $17,000 and make it up to $30,000 if that is the case. You have the knowledge that if you use up all your spare money you have the full pension to fall back on.
I am before all this superannuation business. My husband was a carpenter and I was a stay at home Mother. Nevertheless we have over one million dollars (excluding our residence) in mixed assetts. We also provided a house for a daughter and started our son in Business for himself.
We do not get the pension of course and I hope it will always be that way. Why this fixation on getting a pension, it is much better to be independant? Also whatever assetts you have go to your heirs.
They can now reduce your pension through the means testing system of assets/income tests.say they reduce your income from the $22,000 approx (married pension now) to $17,000 and you make it up to $30,000 from your own money,you do not have a good standard of living
A puzzling statement because if you do not have a good standard of living on $30,000 how can you have one on $22,000?
Surely it is better to get the $17,000 and make it up to $30,000 if that is the case. You have the knowledge that if you use up all your spare money you have the full pension to fall back on.
I am before all this superannuation business. My husband was a carpenter and I was a stay at home Mother. Nevertheless we have over one million dollars (excluding our residence) in mixed assetts. We also provided a house for a daughter and started our son in Business for himself.
We do not get the pension of course and I hope it will always be that way. Why this fixation on getting a pension, it is much better to be independant? Also whatever assetts you have go to your heirs.
