UK and Australian pensions: 3 important differences you need to know about

If you’re planning for your retirement, you’ll likely have a lengthy checklist of items to consider. Two major ones might be “where will I draw my retirement income from?” and “where do I want to retire?”.

No matter where in the world you choose, your pensions are likely to form the backbone of your retirement income. But the pensions themselves —the rules and regulations surrounding them — can differ significantly depending on what type of pension you have and whether the pension is based in the UK or Australia. 

Here are three important differences you need to know about when planning for retirement.

1. The UK State Pension is contributions-based, while the Australian Age Pension is means-tested

One major difference between the pension systems in the UK and Australia concerns how government provided pensions work. 

The UK State Pension

In the UK, the State Pension is accrued through National Insurance contributions (NICs) and is available to you once you reach the State Pension Age (SPA) of 66 (rising to 67 by 2028). 

You gain credits for each “qualifying year” in which you make the necessary level of contributions and require 35 qualifying years to receive the full UK State Pension.

Additionally, you can obtain “qualifying years” if you receive certain benefits, such as Child Benefit or Universal Credit. 

If you haven’t gained the necessary number of credits to qualify for the full UK State Pension, there are ways to make catch-up contributions. If you’d like to find out more about how this process works, you should get in touch.

As of the 2023/24 tax year, the full UK State Pension works out as £203.85 each week or £10,600 each year. 

Read more: 6 important facts about the UK State Pension that could benefit your retirement plans if you’re living in Australia

The Australian Age Pension

Meanwhile, in Australia, the State Pension equivalent is known as the “Age Pension”. 

To be eligible for the Age Pension, you’ll usually need to:

  • Be age 67, but this can depend on the year you were born
  • Have been an Australian resident for at least 10 years, including a period of at least five years with no break
  • Meet the income and asset means tests.

These tests will measure your income and the value of your assets. If the value of these falls above certain limits, your pension payment will be gradually reduced, or you may find you’re not eligible at all. 

How much you get also depends on whether you’re single or in a couple. 

It can quickly become a complex situation with various benefits and schemes potentially affecting your entitlement or whether you qualify for the Age Pension at all.

The maximum basic, or “normal”, rates for the Age Pension each fortnight are:

  • AUD 971.50 for individuals (single people)
  • AUD 1,464.60 for couples (combined figure).

If you are unsure whether you are eligible to receive the Age Pension, you should get in touch to discuss your circumstances and receive expert advice. 

2. You can opt out of a UK workplace pension but not an Australian one 

The fundamentals of UK and Australian private pensions are very similar, although there are a few notable differences.

Types of pension schemes

Defined contribution (DC) pensions and superannuation funds are the main type of workplace and private pension schemes in the UK and Australia. 

A DC pension, or superannuation in Australia, allows you to build up a pension pot that is designed to pay you a retirement income. This is typically based on how much you – or, in the case of a workplace scheme, your employer as well – contribute, and how much this grows over time.

Alternatively, you may have a defined benefit (DB) pension. The pension you’re entitled to under a DB pension scheme is based on:

  • Your salary – typically your salary when you retire or an average of the previous few years
  • How many years you’ve been a member of the scheme
  • The accrual rate of the scheme.

You are then paid a secure income for life, which normally increases year-on-year in line with inflation. DB pensions have largely been phased out in both the UK and Australia for new workers, but if you do possess one, they can have a range of attractive benefits. 

Workplace pension rules differ between the UK and Australia

In the UK, workplace pensions have worked on the basis of “auto-enrolment” since 2012. Auto-enrolment requires all UK employers to automatically enrol their eligible employees into a workplace pension scheme.

While you could choose to opt out of making contributions, if you take part in a workplace pension scheme, you’ll:

  • Make monthly contributions from their income amounting to at least 5% (including tax relief)
  • Receive a minimum employer contribution to their pot of 3% (although employers can choose to pay more or match increases in employee contributions)
  • Benefit from government Income Tax relief on their contributions. Basic-rate relief is usually paid at source, and higher- and additional-rate taxpayers can claim for additional relief through their self-assessment tax return. The Annual Allowance (£60,000 in the 2023/24 tax year) limits the amount of tax-efficient contributions.

Meanwhile, in Australia, workplace superannuations are mandatory and have been since 1992. 

Under the “superannuation guarantee”, employers are required to make contributions of 11% (as of 1 July 2023) of an eligible employee’s monthly income to a nominated super fund.

This contribution comes from the employer and not directly from the employee’s income. 

Employers are required to make workplace superannuation contributions at least once every three months. 

Superannuation work benefits are available to workers in Australia across the board and aren’t dependent on whether you’re full-time or part-time, or if you are an Australian citizen or a temporary resident. 

However, certain criteria might mean you’re ineligible for employer superannuation contributions, such as if you’re: 

  • A non-Australian resident and you’re paid to do work outside Australia
  • An Australian resident paid by a non-resident employer for work done outside Australia.

If you’re self-employed in either the UK or Australia, you’ll likely have to organise your own private pension arrangements. 

While this might give you greater freedom to select a pension scheme or super fund that best suits your personal needs and preferences, you’ll also not benefit from the “free money” of employer contributions. 

You will also need to stay on top of your own pension contributions to ensure you don’t fall behind on your long-term savings goals.

If you’re unsure of whether you qualify for an Australian workplace super, or if you’re anxious about making the right decisions for your private pension, you should reach out for advice to help review your situation.

3. Private and workplace pension allowances and taxes can differ between the UK and AUS

Allowances function in broadly the same way, but their limits differ

As mentioned, the UK has an Annual Allowance on tax-relievable pension contributions of £60,000 (2023/24 tax year). 

If you have any unused Annual Allowance, it can be carried forward from up to three previous tax years. So, it’s possible to contribute more than £60,000 in a single tax year to your pot tax-efficiently. 

Meanwhile, in Australia, there are typically two types of contributions you (or others) can make into a super fund. They are:

  • Concessional contributions made from income that has not yet been taxed. This is typically taxed at the point of contribution at a rate of 15%, provided you earn under AUD 250,000 and you stay below the annual concessional contributions cap of AUD 27,500 (2023/24 tax year). Your workplace employer superannuation contribution is included as earnings when measuring against the tax threshold
  • Non-concessional contributions are those made from previously taxed income and are usually not subject to further taxes. Although, if you exceed the non-concessional contributions cap (AUD 110,000 each year as of the 2023/24 tax year), they may still incur additional liability. 

The way taxes work once you access your pension can be very different

UK pension contributions typically benefit from tax relief, but taxes can apply when you eventually draw your pension. Whereas pensions in Australia are taxed at the point of contribution and are typically tax-free once accessed, but this can depend on certain circumstances.

In the UK, you can normally access your private pension pots at age 55, rising to age 57 in 2028. 

DB pensions are normally taxed at your respective rate of Income Tax. 

Meanwhile, if you withdraw your funds from a DC pension pot as a lump sum, you can usually take 25% tax-free and the remainder will be taxed at your marginal rate of Income Tax.

You can access your pension whether you are still working or not, and can also choose to take it in smaller withdrawals rather than as a lump sum. 

In Australia, pension withdrawals are typically tax-free, but you’ll usually have to be:

  • At least 60 before you gain tax-free access, as long as conditions are met, such as being fully retired
  • Age 65, where unfettered tax-free access means you can opt to continue working, or return to work, and maintain your pension.

You could additionally access your super once you reach the Australian preservation age, which is 55 but can differ depending on when you’re born, as shown by the table below:

Source: ATO

Additionally, you would have to meet certain conditions to ensure it remains tax-free – including being permanently retired.

If in doubt, get in touch

Pensions can be incredibly complex areas at the best of times. They can be even more so if you’re dealing with differences in rules and regulations across two different countries like the UK and Australia. 

If you have pension interests in both countries and want to know your options for your retirement plans, it is important you reach out for expert advice, especially if you’re considering transferring your pension pots between countries. 

Please email or call 0498 740 840.

Please note

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

This information in this email and article is general advice and does not take account of investors’ objectives, financial situation or needs. Before acting on this general advice, investors should therefore consider the appropriateness of the advice having regard to their objectives, financial situation or needs.

Financial solutions for expatriates in Australia | Jason O’Connell is an Authorised Representative (“AR”)  1269423 Shartru Wealth Management. ABN: 46 158 536 871 operating in Australia under AFSL: 422409. 

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