The UK State Pension – the money that the government pays to those who have reached retirement age – is seen by many as unfair. Not only is the payout peanuts at just £168.60 per week (£8,778 per year), but the age at which you can access it is increasing and within the next decade it will hit 67.
I can certainly understand why the State Pension is a source of frustration for many. For a start, it’s nearly impossible to live off less than £9K a year, particularly if you’re a single retiree. Secondly, not many of us want to work until we’re in our late 60s.
However, before we all complain about the State Pension, it’s worth looking at the other side of the coin. I’m referring to the incredible incentives that the UK provides to those who are willing to save for retirement. Looking at what’s on offer in other countries, I believe the UK has one of the most generous retirement saving set-ups in the world.
A great set-up for retirement savers
For example, consider pension tax relief. Put £800 into your pension and the government will top this up to £1,000 (higher-rate taxpayers get an even better deal). Considering that you can contribute up to £40,000 per year into a pension and qualify for tax relief, that’s a brilliant deal. Put £5,000 into a pension every year from the age of 40 and earn an 8% return on your money through the stock market on top of the tax relief, and you’re looking at savings of nearly £500,000 by the time you turn 65.
Then, there’s the Stocks and Shares ISA. This account, the contents of which you can access at any time, allows you to invest up to £20,000 a year tax-free. In other words, any capital gains or income you generate from your investments are sheltered from the taxman. Again, this is a fantastic deal. Build up a portfolio of dividend stocks within your ISA, and you could have a passive retirement income which is completely tax-free.
Finally, there’s the Lifetime ISA, which is open to those aged 18 to 40. Invest £4,000 into this account, and not only will all your gains and income be tax-free, but the government will also give you a bonus £1,000 up to age 50. That’s a phenomenal deal! Put in £4,000 every year from age 35 and earn an 8% return per year through stocks, and by 50, you could have retirement savings of nearly £150,000.
Take advantage and retire wealthy
I can’t stress enough that these are amazing deals. Compared to what’s on offer in other countries, UK pension and ISA limits are extremely generous.
For example, in the US, the annual contribution limit for the Individual Retirement Account (IRA) is currently $6,000 (about £4,600). And Canada’s Tax-Free Savings Account (TFSA), which is similar to a Stocks and Shares ISA, currently has an annual limit of C$6,000 (about £3,500). Meanwhile, in Australia, where I’m from, there’s no tax-efficient savings account like the ISA where you can shelter your gains from the taxman.
So, while the UK State Pension may be one of the worst pensions in the developed world, there is another side to the story here. Take advantage of the UK’s generous retirement saving set-up, and invest your money wisely, and there’s no reason why you can’t retire with quite a significant sum of money, free of State Pension worries.
