SS reform - the UK way

[nun]

The UK is going ahead with it's version of SS reform. The UK state pension age is increasing from 65 to 66 and eventually 67. You'll need 35 years of contributions, rather than the current 30, to get the full state pension and it will also no longer be dependent on earnings, but only on the number of years of contributions you've paid. Consequently high earners will see their state pensions reduced, and the low waged will get an increase.

State pension reform unveils future £144 per week flat payment | Money | guardian.co.uk

The UK has also implemented an "opt out" personal retirement savings scheme. Think of it as an automatic 401k where everyone who earns a wage is automatically enrolled in a DC scheme; both employees and employers must contribute. The employee can opt out, but they must actively do it and an there are big fines if an employer is found to be involved in that decision.

These state mandates and redistribution of wealth have been implemented by a Conservative government in an effort to get everyone a reasonable retirement income. I don't expect this approach to be adopted in the US, but it's an interesting perspective.

 

[haha]

it will also no longer be dependent on earnings, but only on the number of years of contributions you've paid. Consequently high earners will see their state pensions reduced, and the low waged will get an increase.

State pension reform unveils future £144 per week flat payment | Money | guardian.co.uk

This this change of benfit rules affect retirees who are alrady drawing benefits, or only looking forward? If looking forward only, is there a buffer zone where you still still get the old formula, or is it sudden death ?

Ha

 

[Alan]

This this change of benfit rules affect retirees who are alrady drawing benefits, or only looking forward? If looking forward only, is there a buffer zone where you still still get the old formula, or is it sudden death ?

Ha

I've listened with interest to discussions on the BBC radio, and they seem to be quite clear that those already retired and drawing more than the new flat rate will continue to draw the higher amount. There is also a phase in period. They also point out that it is cost neutral to the government so there are winners and losers, the biggest winners being women who take time off their careers to have children.

 

[Jay_Gatsby]

The UK is going ahead with it's version of SS reform. The UK state pension age is increasing from 65 to 66 and eventually 67. You'll need 35 years of contributions, rather than the current 30, to get the full state pension

I'm a fan of this and think the U.S. should follow suit for Social Security and Medicare. Lifespans have been growing for years without a commensurate increase in the eligibility age for so-called "entitlements".

and it will also no longer be dependent on earnings, but only on the number of years of contributions you've paid. Consequently high earners will see their state pensions reduced, and the low waged will get an increase.

Sorry, not a fan of this. As you point out, it's wealth redistribution plain and simple. The low waged are often that way because of poor choices, lack of drive, etc... Not saying this is always the case, just that too many folks choose to stay uneducated and/or underpaid. Those who take risks in life and become educated should be entitled to reap the rewards of their efforts.

The UK has also implemented an "opt out" personal retirement savings scheme. Think of it as an automatic 401k where everyone who earns a wage is automatically enrolled in a DC scheme; both employees and employers must contribute. The employee can opt out, but they must actively do it and an there are big fines if an employer is found to be involved in that decision.

I'm a fan of this as long as the Government doesn't change the rules on those who participate by confiscating some of these monies through higher taxes, eliminating other government benefits because such individuals can afford to pay for them, etc....

These state mandates and redistribution of wealth have been implemented by a Conservative government in an effort to get everyone a reasonable retirement income. I don't expect this approach to be adopted in the US, but it's an interesting perspective.

Agreed

 

[haha]

I've listened with interest to discussions on the BBC radio, and they seem to be quite clear that those already retired and drawing more than the new flat rate will continue to draw the higher amount. There is also a phase in period. They also point out that it is cost neutral to the government so there are winners and losers, the biggest winners being women who take time off their careers to have children.

Thanks Alan. As usual, the details and implementation will eventually tell the tale.

Ha

 

[gerrym51]

we already give lower wage earners a bigger deal.

 

[Alan]

Thanks Alan. As usual, the details and implementation will eventually tell the tale.

Ha

I listened to Moneybox again this week where they took a number of callers, including one guy who had accumulated 32.5 years of contributions, and had ER'ed 2 years ago when he was 55. He asked if it would be worth his while to do voluntary contributions for 2.5 years to get him to the new max requirement of 35 years. The experts told him to wait until full implementation in 2017 and then get an official estimate as his 32.5 years of contributions under the old rules could well be more than the old rules, and then he would get the higher payment.

However, if the 32.5 years are calculated under the new system, then it would cost him a total of £700 to get those 2.5 additional years and the increase in payments was less than a 2 year payback. Needless to say, he was happy enough with the answer.

 

[Jay_Gatsby]

I've listened with interest to discussions on the BBC radio, and they seem to be quite clear that those already retired and drawing more than the new flat rate will continue to draw the higher amount. There is also a phase in period. They also point out that it is cost neutral to the government so there are winners and losers, the biggest winners being women who take time off their careers to have children.

I'm okay with the current recipients drawing the higher amount and a phase in period. However, making things cost-neutral to the government by shifting money from the wealthy to the not-so-wealthy is, as I pointed out earlier, simply wealth redistribution. That said, governments are obligated to do what is best for society even if some do not agree with such policies. It would appear that the UK Government believes that population growth and parental child-rearing are societal needs that override the need of the wealthy to retain their paid-in benefits.

To Nun's earlier point, this likely will not fly in the U.S. due to a more fractured political environment.

 

[nun]

I listened to Moneybox again this week where they took a number of callers, including one guy who had accumulated 32.5 years of contributions, and had ER'ed 2 years ago when he was 55. He asked if it would be worth his while to do voluntary contributions for 2.5 years to get him to the new max requirement of 35 years. The experts told him to wait until full implementation in 2017 and then get an official estimate as his 32.5 years of contributions under the old rules could well be more than the old rules, and then he would get the higher payment.

However, if the 32.5 years are calculated under the new system, then it would cost him a total of £700 to get those 2.5 additional years and the increase in payments was less than a 2 year payback. Needless to say, he was happy enough with the answer.

I got a similar answer form Dept of Work and Pensions. They are going to increase the number of back years of National Insurance you can pay so you can make up the extra 5 years if you ERed with 30 years of contributions.

I like the reforms as I've been paying voluntary Class 2 NI for 30 years and under the old scheme I'd get a pension of 107 GBP a week. The new one gives me 144 GBP a week.

I also like the philosophy behind the changes in that the state pension becomes far simpler and provides a base of income for everyone rather than providing an earnings related retirement pension. It reminds me of the ethos behind the NHS which I admire.

Alan, I also listen to Moneybox and I'm amazed at how expensive investing is in the UK, how much advisers and brokers still have control of the system and how ignorant people in the UK appear to be about money matters and investing.

 

[Alan]

Alan, I also listen to Moneybox and I'm amazed at how expensive investing is in the UK, how much advisers and brokers still have control of the system and how ignorant people in the UK appear to be about money matters and investing.

I showed my BIL this a few years ago while we were staying at his place. He is very financially aware and suggested that I should move our UK savings into a fund from a company like Fidelity that operates in both countries. On the Fidelity.co.uk website we looked up a fund that tracked the US stock market and noted the fees. We then looked up the equivalent Fidelity Spartan fund on Fidelity.com and he was really shocked at the huge difference in fees.

 

[nun]

I showed my BIL this a few years ago while we were staying at his place. He is very financially aware and suggested that I should move our UK savings into a fund from a company like Fidelity that operates in both countries. On the Fidelity.co.uk website we looked up a fund that tracked the US stock market and noted the fees. We then looked up the equivalent Fidelity Spartan fund on Fidelity.com and he was really shocked at the huge difference in fees.

Yes I've done that for Fidelity and Vanguard. Basically the US and European operations are completely different because of regulations and comparing them isn't really valid. In some ways I'm glad that when I return to the UK my money will mostly stay in US based funds with low fees. The UK pension industry is a complete rip off.

 

[Alan]

Yes I've done that for Fidelity and Vanguard. Basically the US and European operations are completely different because of regulations and comparing them isn't really valid. In some ways I'm glad that when I return to the UK my money will mostly stay in US based funds with low fees. The UK pension industry is a complete rip off.

We may well move back in a few years and will certainly be keeping our US based funds in the US. I will have UK SS plus UK private pensions from 2 former employers so I'm not looking forward to sorting out the taxes, although I expect that after a couple of years I'll get the hang of it.

 

[ERhoosier]

Excuse my ignorance, but does UK assess income tax on state pension benefits as US does? I've often felt that US in effect does "means test" SS by subjecting it to income taxation.

 

[BigNick]

Excuse my ignorance, but does UK assess income tax on state pension benefits as US does? I've often felt that US in effect does "means test" SS by subjecting it to income taxation.

The UK state pension is taxable. I think that's a good thing. People with no other income will not be in any sort of income tax bracket.

It's worth noting that the UK and the Netherlands are the only two major European countries where the state pension is a fixed monthly/weekly amount for all, more or less regardless of previous income. In those countries, your pension can be reduced if you didn't pay into the scheme for enough years, but that reduction is a function of the number of years where you paid the minimum, not how much you paid in. As such it's a pretty poor deal for high earners.

Most other European countries have a system where your pension is a more-or-less linear function of your contributions, which are typically a percentage of your salary; there is often a slightly artificial "floor" to these schemes (to guarantee a minimum pension amount), plus there is a ceiling on your annual contributions at, say, 4 times the minimum wage, which in turn caps the pension amount. People who earn more than that are assumed to be able to sock money away to keep themselves in the style to which they've become accustomed; typically they will be paying a high marginal tax rate, but able to deduct their private pension contributions, IRA-style.

 

[nun]

The UK state pension is taxable. I think that's a good thing. People with no other income will not be in any sort of income tax bracket.

It's worth noting that the UK and the Netherlands are the only two major European countries where the state pension is a fixed monthly/weekly amount for all, more or less regardless of previous income. In those countries, your pension can be reduced if you didn't pay into the scheme for enough years, but that reduction is a function of the number of years where you paid the minimum, not how much you paid in. As such it's a pretty poor deal for high earners.

Most other European countries have a system where your pension is a more-or-less linear function of your contributions, which are typically a percentage of your salary; there is often a slightly artificial "floor" to these schemes (to guarantee a minimum pension amount), plus there is a ceiling on your annual contributions at, say, 4 times the minimum wage, which in turn caps the pension amount. People who earn more than that are assumed to be able to sock money away to keep themselves in the style to which they've become accustomed; typically they will be paying a high marginal tax rate, but able to deduct their private pension contributions, IRA-style.

The UK currently has a system where you get a basic state pension and then a second state pension that is linked to your earnings. The system was deemed to be to complex and expensive to continue and so the current reforms that will come into effect in 2017 will calculate the state pension on the number of years of contributions up to a max of 35. The max benefit comes with 35 years of contributions and is 144 GBP a week. If you have 30 years you;'d get 30/35 of that.

The state pension is taxed, but the UK has quite generous standard tax free allowances, but the base rate is 20%.

 

[obgyn65]

I like the reform also. I have about 20-25 years right now and would like to continue paying Class 2 NI (or class 3 when I FIRE) for another 15 years.

I like the reforms as I've been paying voluntary Class 2 NI for 30 years and under the old scheme I'd get a pension of 107 GBP a week. The new one gives me 144 GBP a week.

 

[Huston55]

I'm a fan of this and think the U.S. should follow suit for Social Security and Medicare. Lifespans have been growing for years without a commensurate increase in the eligibility age for so-called "entitlements".

Well, the US already has raised it's SS eligibility age(s), with the SS Reform Act of 1983, to where the UK is moving, and life expectancies in the US are ~2 yrs less than in the UK. Are you suggesting that US SS eligibility age(s) be raised again?

+1 on your other comments.

 

[nun]

Well, the US already has raised it's SS eligibility age(s), with the SS Reform Act of 1983, to where the UK is moving, and life expectancies in the US are ~2 yrs less than in the UK. Are you suggesting that US SS eligibility age(s) be raised again?

+1 on your other comments.

I'm 51 and my UK pension eligibility will be 66 compared to 65 in the US. Also in the US I get the option to take early SS at 62, you don't get that in the UK. Both countries allow you to defer SS and get bigger payments.

 

[Major Tom]

The max benefit comes with 35 years of contributions and is 144 GBP a week. If you have 30 years you;'d get 30/35 of that.

The state pension is taxed, but the UK has quite generous standard tax free allowances, but the base rate is 20%.

Will this new pension replace both the basic pension as well as the pension that is linked to earnings?

I grew up in the UK, but moved to the US shortly after graduating from University. My work history there is minimal, so the changes won't affect me. However, my first reaction on reading that the max benefits will be 144 GBP/week was that it isn't very much, and that US SS looks positively generous by comparison.

 

[Huston55]

I'm 51 and my UK pension eligibility will be 66 compared to 65 in the US. Also in the US I get the option to take early SS at 62, you don't get that in the UK. Both countries allow you to defer SS and get bigger payments.

If you're 51 (born after 1960) your US SS FRA is 67, not 65. So, even though you can take US SS early at 62, your payment will be decreased by 30% versus a 20% decrease for someone (born in 1937 or earlier) who's FRA is 65. I don't know of any reason these rules would differ because you have dual citizenship.

Hope this doesn't cause an adjustment in your RE plans.

 

[nun]

Will this new pension replace both the basic pension as well as the pension that is linked to earnings?

I grew up in the UK, but moved to the US shortly after graduating from University. My work history there is minimal, so the changes won't affect me. However, my first reaction on reading that the max benefits will be 144 GBP/week was that it isn't very much, and that US SS looks positively generous by comparison.

Yes it replaces the basic and second earnings related pensions.

UK state pension isn't much compared to the US or other countries, but you don't have any health insurance costs and get other benefits like bus passes and fuel allowances, although they might not be around much longer.

 

[nun]

If you're 51 (born after 1960) your US SS FRA is 67, not 65. So, even though you can take US SS early at 62, your payment will be decreased by 30% versus a 20% decrease for someone (born in 1937 or earlier) who's FRA is 65. I don't know of any reason these rules would differ because you have dual citizenship.

Hope this doesn't cause an adjustment in your RE plans.

Doh! I had Medicare on the brain

 

[Major Tom]

Yes it replaces the basic and second earnings related pensions.

UK state pension isn't much compared to the US or other countries, but you don't have any health insurance costs and get other benefits like bus passes and fuel allowances, although they might not be around much longer.

I hadn't thought about the lower out-of-pocket healthcare costs in the UK - and I remember hearing my brother (in the UK) talk about getting his winter fuel allowance.

 

[nun]

I hadn't thought about the lower out-of-pocket healthcare costs in the UK - and I remember hearing my brother (in the UK) talk about getting his winter fuel allowance.

Also remember the generous tax free allowances in the UK. If you are over 65 the first $16k (10.5k GBP) of income is tax free and the first $16k of capital gains are also tax free