But we know pensions aren’t exactly the most exciting topic in the world.
So, we’ve tried to keep it as short and sweet as possible — while providing you with all the essential ‘need-to-know’ information about employee pensions in some of our key coverage areas.
Europe
The UK government offers a state pension to men born before 6 April 1951 and women born before 6 April 1953. To be eligible for the UK’s basic state pension, a person must have paid or been credited with National Insurance contributions throughout their life. Currently, the full basic state pension is a weekly payment of £134.25.
UK citizens also have access to a workplace or occupational pension, funded by contributions from employed persons and their employer. Employees are automatically enrolled on this scheme but can opt out at any time.
These contributions are a percentage of the worker’s income — currently, a minimum of 3% from the employer and 5% from the employee to reach a minimum 8% contribution. Employers can agree with their employees to conduct their workplace pension via a salary sacrifice scheme. Simply put, this means part of the employee’s salary goes straight into a pension before tax.
Personal pensions are also available in the UK, where individuals can make contributions via an external provider. Stakeholder pensions, group personal pensions and SIPPs are just a few examples.
Similar to the UK, Germany’s state pension scheme also works on a ‘pay-as-you-go’ basis, and it’s mandatory for most employers and their employees to pay contributions to their state social security pension. This pension is financed through equal contributions from both the employee and the employer at a total of 18.6% of the employee’s gross salary (although this figure is set to increase to 20% by 2025).
The retirement age at which you can claim a state pension in Germany is 65 years and seven months but will increase to 67 years by 2029.
In Germany, employers must give their staff the option to make contributions to their workplace pension through salary sacrifice. Employers can also choose to fund a voluntary, private occupational pension via direct pension promises or through an external pension provider, such as Riester or Rürup.
As ranked by Investopedia, the Netherlands has the world’s best pension scheme — and for good reason!
The Netherlands’ pension system is designed around three pillars: the Dutch state pension (known as AOW), the voluntary occupational pension funded by employer and employee contributions and the optional private pension pillar, funded by personal contributions.
The AOW is a statutory minimum guaranteed pension income for all employees. Every citizen paying wage and/or income tax accumulates approximately 2% AOW entitlement for each year they’ve lived or worked in the Netherlands. Contributions towards this state pension happen via a salary sacrifice (at about 17.9% of the total gross salary) and are deducted before tax.
Similar to many nations around the world, the statutory retirement age is being raised. Currently, it’s 66 years and four months, but this figure is set to increase by three months in 2022 and is expected to reach 67 years by 2024.
Optional occupational pensions are also accrued by most employees during their working lives. A collective employment agreement is drawn up between employers and each employee where a contribution figure is agreed. While this isn’t mandatory for employers, participation in an industry pension fund may be made mandatory for an entire sector.
The first pillar of Switzerland’s pension plan is a pay-as-you-go system financed by employees and their employers, who each pay 4.2% of the worker’s annual income. As it’s based on a percentage of income, there’s no limit to this pension, but the payout is determined by the number of years worked in Switzerland and the average income. This old-age pension is paid at age 65 for men and 64 for women — provided they’ve made at least one year of contributions.
The second pillar is the occupational pension. If a person is affiliated to the first old-age pension and receives an annual salary of more than CHF 21,330 (EUR 19,621) from the same employer, that employee must be insured under this plan.
The occupational pension is compulsory for eligible workers and is funded by both employees and employers. The employer should be contributing at least the same (if not more) than the employee’s contributions. Once retired, the capital accumulated throughout an employee’s life is converted into an old-age pension.
The US
In the US, the three most common types of retirement plans are social security, plans offered by employers and personal savings or investments.
Most people employed in the US rely on the social security system that pays out based on lifetime earnings. However, the majority of Americans will also have a voluntary occupational or personal private scheme in place to ‘top up’ their retirement income.
The Social Security State Pension is available for all American citizens over the age of 65. The benefit received is calculated based on each individual’s average wages over their lifetime.
The state pension system operates on a pay-as-you-go basis and is funded by social security taxes paid by employers and employees, as well as tax paid by those in the higher income band and any interest earned on trust fund reserves. The proportion paid by employers and employees is split equally at 6.2% each (for a total of 12.4%), and contributions are exempt from taxation. Currently, the retirement age in the US depends on when the retiree was born and is between 65 and 67.
Occupational pensions in the US are predominantly on a defined contribution basis rather than a defined benefit.
Defined benefit plans are funded by employers directly from the company’s profits and don’t require contribution from employees. In contrast, a defined contribution plan is funded primarily by employees who choose to bear the investment risk. Generally, employers choose the contribution plan as they’re far more cost-effective and less complex to manage.
The most widespread defined contribution plan is the 401(k). This plan gives employees more flexibility and distribution options for retrieving their account balances via either a lump-sum payment, instalment payments or annuities.
Other available defined contribution plans include:
- 403(b) plan
- 457 plan
- Simple IRAs
- SEP IRAs
- Employer-sponsored IRA
It’s key to note there are new regulations in place to encourage employers to automatically enrol their employees onto existing defined contribution plans if the employee doesn’t make a decision.
Australasia
Australia’s government offers a national ‘age pension’ that provides an equal sum to all employees meeting specific criteria and asset tests. It’s funded through taxes and pays a minimum benefit equal to approximately 25% of the average wage.
Workers also have access to a mandatory ‘superannuation guarantee’ into which they are automatically enrolled. Employers are required to make contributions into a retirement account (the ‘super’) for any individuals who qualify. This regulation requires employers to pay 9.5% of an employee’s gross annual into either a defined benefit plan or a defined contribution plan. Most employers make regular contributions to their employees’ funds rather than making lump-sum payments each year. This scheme covers all workers except those on low income and those outside the age bracket of 18 to 70.
When it’s time to access the pension, retirees can take the money as a lump sum or a lifetime payment.
New Zealand offers a flat-rate public pension scheme via the state, eligibility for which is subject to a residency test. This system is universal and isn’t related to income, and the total funding of this scheme is borne by the government. Anyone aged 65 and above with 10 years’ residence after the age of 20 is eligible.
Workers also have access to the quasi-mandatory ‘KiwiSaver’ — an occupational pension scheme in which any person (under the age of 65) with a legal right to reside in New Zealand is entitled to benefit from. Newly hired employees who are over 18 are automatically enrolled and have eight weeks to opt out.
The employee must choose the KiwiSaver scheme provider to where the savings should be allocated as well as how much to contribute. The contribution rate is either 4% or 8% and calculated based on gross salary. Employer contributions are voluntary and subject to a vesting scale. Employers with an existing, approved superannuation scheme may apply for exemption from automatic enrolment into the KiwiSaver.
Other private, voluntary pension schemes include the employer superannuation plan and the personal superannuation plan.
As a trusted Employer of Record, TopSource Worldwide can help you stay on the right side of the law when it comes to pensions. If you’re in need of a global PEO to assist with your global expansion, get in touch today.
