By: Laura Walton AFC®
Doesn’t that sound somehow better than “retirement plan?” We’re just back from the UK where I picked up a local paper at the airport. The iNews Money column responded to a person dissatisfied with his pension scheme which he described as “extremely poor value for the money.” He wondered if he had to participate and the answer gave an insight into the similarities and differences between their “schemes” and our “plans.”
Since 2012, UK employers have had to enrol (British spelling) their employees in their pension schemes as part of a government initiative to get more people to save for retirement.This applies to employees who are between the age of 22 and pension age (currently 60 for women and 65 for men but both will increase to 66 by 2020 and further to 68 by 2028) and who make more than about $13,000 per year.
Employees can opt out of the pension scheme at any time as well as opt back in. If they opt out, they are automatically re-enrolled every three years but, as before, can simply opt out again.
The Brits require minimum contributions. Today, the minimum employer contribution is 2% while the minimum employee contribution is 3%. Starting April 5, 2019, the minimums go to 3% and 5% respectively. If the employer contributes more than their minimum, the employee only needs to make up the difference.
The employee contribution is based on earnings between about $8,000 and $60,000. For example, if you’re paid $40,000, your contribution would be based on $32,000 of earnings.
The Money columnist, Harry Rose, points out that there is likely an option to invest in “default funds” designed to achieve a “sensible” mix of investments, i.e. target date funds. Otherwise, he recommends investing in a variety of funds – some in shares (stocks), some in government and corporate bonds and some in “property” – in other words, select an appropriate allocation – and keep “charges” (fees) low.
At retirement you can take 25% of the balance out tax-free. Yes, the employee’s contributions are tax deductible (eligible for “tax relief”) but to what extent I’m not clear and, according to Teresa Hunter, an experienced financial journalist, no one is: “The problem with pensions is that no one – and I mean no one – fully understands how all the rules and regulations fit together. Pity the poor taxpayer who tries to make an honest fist* of providing for his future.”
The British manner of speech makes even the dull subject of pension schemes sound more interesting – “cheers!”