Expert Opinion: Which country has is better off with retirement, US or UK?

Retirement is an ever-changing and difficult subject matter for Americans and UK citizens in these times. There are many strong comparisons for retirement prospects on both sides of the Atlantic, and a few major differences.

For specific comparisons, it is helpful to look at the offering differences between some of the major banks in each country. For example,compare Halifax UK Bank offers current accounts in the UK for retirees and Wells Fargo’s (US Bank) offers of similar accounts –

For a deeper look into the background, read on…

To begin with, under the FDR administration the US installed Social Security, a rapidly expanding retirement system to provide retirement living for citizens. It was modeled in large part on the UK’s National Insurance scheme.

With both systems, current workers pay into the program and fund the retirement pensions of the currently retired. Benefits received are based on contributions and earnings, but the actual funding comes from those who are still contributing.

The number of retiring Americans is expected to begin increasing these years as the notorious “baby boomer” (Americans born between 1946-1964) generation approaches the classic retirement age of 65.

Unfortunately, this presents tremendous problems for Social Security as the system will be bankrolled by a population of Americans that are poorer than the Baby Boomers and who don’t enjoy the same ratios. The boomers supported a retirement population much smaller than themselves but when they are retired they will be supported by generations that are not far more numerous and are struggling to find employment.

The US technically has savings for the purpose of trying to cover Social Security’s promises to the baby boomers but the US also has $16 trillion in debt that makes the 1$ trillion in savings more than a little suspect.

The UK has similar problems but not anywhere close to the scope and degree of what the US’s system faces. For that reason, their people currently saving towards retirement are in a stronger position with regards to expecting returns from National Insurance without having to push back the retirement age (65 in both nations) or see an increase in payroll taxes to cover the unfunded liabilities.

Apart from those national systems, there are a few differences between the UK and US’ other retirement plan options.

Within the US, workers generally contribute towards retirement through three tax-sheltered vehicles, the 401k, Roth IRA, and traditional IRA. For their part, the UK features Private Pension schemes, defined benefit plans, and ISA’s.

With the ISA, you can invest once you turn 18 and invest as much as £11280 in a stocks and shares ISA or £5640 in a cash ISA. This money can be withdrawn at any time without penalty. The money collected from interest on an ISA is not taxed.

Americans have the Roth IRA, which is also free from taxation on interest. However, you cannot withdraw from a Roth IRA without suffering tax penalties until you are 59 ½ without a qualifying reason, and you can only pay in $2k per year into this kind of retirement account.

The 401k is a popular new retirement strategy in the US that involves an employer offering investment plans for their workers that are matched up to a certain amount by the employer. For instance, perhaps the employer will match up to 3% of a paycheck. The employee can invest 3% of every paycheck into their 401k account and that amount will also be invested into the account by the employer.

The 401k is tax-deferred, so the employee doesn’t pay taxes until they withdraw the money. Once the employee reaches 59 ½ and is no longer in the service of the company they can withdraw their funds.

In the UK, the defined benefit plan is a more common tool. With this system, an employee usually makes a contribution to the retirement plan and the employer does as well. They use a formula based on earnings and contributions to determine a specified amount of benefits to be paid out to the employee when they retire.

For the employer, the advantage lies in the fact that if the invested portfolio does better than necessary to provide the already defined pension, than the employer collects the surplus interest. However, regardless of how well the investments go, the employer still has to pay the defined amount to the worker.

The 401k requires more responsibility on the part of the worker and also rewards or punishes them for the outcome of their investment.

Finally there’s the traditional American IRA, which is another tax-deferred scheme in which citizens can invest certain amounts of money per year without taxation depending on their earnings. The more you make in earnings, the less tax protections you are entitled to. The UK has the similar Private Pension plans, which work in much the same fashion.

There are other retirement account options and tax-shields in both nations but these comprise the majority of retirement investments.

Given the instability on Wall Street and in the markets, combined with the massive liabilities of Social Security and US government debt, the UK has advantages for retirees in their more precise pension plans and less precarious National Insurance.

But workers in both nations would be wise to carefully take advantage of the various strengths and weakness in each system to build a diverse portfolio that can allow them to successfully retire when they hit the magical numbers.

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