In its manifesto for the recent general election, the UK Labour Party pledged to undertake a review of the UK pension system, with a view to improving outcomes.
Now they are in government, Labour ministers – including the new Chancellor, Rachel Reeves – are examining various pension systems from around the world to see if there are any learnings that they can use to inform that review.
A recent Citywire article mentioned that the Australian pension system could provide ideas for the UK government as they think about reforming British pensions.
It confirmed that the UK Treasury is working closely with the UK provider, Standard Life, to learn more about the Australian pensions market. A delegation has been sent to speak to key stakeholders, including the Australian High Commission, Fund Managers, and Advisers.
As a financial planning company with offices in both the UK and Australia and, as a result, a key interest in both pension systems, we thought we would set out for you some of the key similarities and differences between the two countries’ approaches.
It’s compulsory for your employer to make contributions to your super fund
The Australian pension system has had a compulsory element since the Keating government introduced the first superannuation guarantee in 1992. Their intention was to reduce dependency on a publicly funded scheme.
As a result, your employer must contribute a minimum of 11.5% of your ordinary time earnings to your superannuation fund. This amount is scheduled to increase to 12% in July 2025.
In addition, you can make your own Concessional Contributions from your pre-tax income, taxed at a concession rate of 15%, subject to your total earnings. These contributions are capped at $30,000 (2024/25 tax year).
You can also make Non-Concessional Contributions. As these are made from your net earnings, they are not subject to any further taxation. These contributions are also capped, at $120,000 in the 2024/25 tax year.
If you have not used your previous annual contribution entitlement, you have the ability to exceed the contribution limits by utilising carry forward for Concessional Contributions and bring-forward for Non-Concessional Contributions.
Non-concessional contributions are an important facility to help you top-up the value of your super fund.
The UK government provides tax incentives on pension contributions
In contrast to the Australian system, compulsory employer pension contributions in the UK only started in 2012. Furthermore, they are currently set at a much lower rate of 3% of an employee’s salary.
As an employee, you also make compulsory minimum contributions of 5%. You are eligible to make contributions of up to £60,000 or 100% of your earnings, whichever is the lower amount, in a single tax year (2024/25).
You will benefit from Income Tax relief on your contributions at your marginal rate of tax whether you are employed or self-employed.
Basic-rate relief is usually paid at source, and you can claim higher- and additional-rate relief through your self-assessment tax return.
Tax treatment of retirement income is the biggest differential between the systems
The most fundamental difference between the Australian and UK systems is around taxation.
As you have read, your personal super contributions are subject to tax. This is either in the form of a concessional rate if they are deducted from your salary, or they are paid from your earnings after tax.
However, when you come to draw income from your super fund, generally you will not be subject to tax on what you take.
In contrast, you will benefit from advantageous tax relief on your contributions to a UK pension, but taxes can apply when you eventually draw your pension.
You can usually take 25% tax-free and the remainder will be taxed at your marginal rate of Income Tax.
The post-retirement landscapes are notably different
Pension Freedoms legislation that came into force in the UK in 2015 provides a remarkable level of flexibility around when and how you can draw from your fund.
In fact, the only two limiting factors are:
- You can’t access your private pension pots until you are 55, rising to age 57 in 2028.
- Only 25% of your fund can be taken free from tax.
Beyond those two restrictions, you can access your pension whether you are still working or not and can also choose to take one-off sums whenever you want, as well as regular income.
In Australia, you usually have to be at least 60 before you gain tax-free access to your super fund. However, you need to meet certain conditions to qualify for this access, such as being fully retired.
You only have unfettered access to your fund from age 65. This means that you can opt to continue working, or return to work, while still maintaining access to your super fund.
Get in touch
If you have any queries about the two countries’ retirement savings options, please get in touch with us.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances. All contents are based on our understanding of HMRC and ATO legislation, which is subject to change.
