Retirement savings are generally incentivised by governments around the world by using tax breaks to encourage people to save money for their retirement. The aim is to ensure that people save enough privately for their retirement, so they do not have to rely on handouts from the government.
The top pension markets by asset size as of 2017* were:
- USA – US$25.4 trillion
- UK – US$3.1 trillion
- Japan – US$3 trillion
- Australia – US$1.9 trillion
- Canada – US$1.8 trillion
Each of these countries will have their own rules regarding retirement savings and how they tax them.
UK Pension tax treatment
The UK pension system works on a “EET” basis. EET stands for Exempt Exempt Taxed.
Pension savings can generally be broken down simply into three stages:
- Contributions – the money that is paid into the pension fund
- Investments/accumulation – the money from contributions held by the pension fund
- Benefits – the money that is paid to you from your pension fund
Each of these stages has its own tax treatment. Taking the UK example;
- Contributions into UK registered pension schemes are exempt from tax due to the tax relief that contributions receive.
- Any investment income or gains made by the pension scheme are exempt from income or capital gains tax.
- Benefits paid from the pension fund will be subject to personal income tax. However, you are able to withdraw 25% of the pension fund tax free.
The 401K pension in the US also works on the EET basis, with the majority of EU states’ pension systems also using the EET structure.
Australian Superannuation tax treatment
Australian Superannuation system is one of the most successful retirement savings markets in the world, thanks mainly to the compulsory employer contributions of 9.5% of salary (rising to 12%), known as “Superannuation Guarantee”. There is around A$2.7tn (£1.5tn) held within Australian Superannuation, as of June 2018, with a population of around 25 million.
Australian Superannuation however works on the TTE basis.
- Contributions into Superannuation are taxed (or paid from after tax income)
- Fund earnings or growth within Superannuation are taxed
- Withdrawals from Superannuation are generally tax free from age 60
You can transfer your UK pension to Australian Superannuation although under current rules you need to be aged 55 or over to do so.
The TTE method allows governments to collect tax immediately, rather than the EET method which means governments have to wait until people start drawing their pension before they start to collect their tax.
*according to the Willis Towers Watson Thinking Ahead Institute’s Global pension assets study 2018