Pensions down under – what we can learn from the Australians
MoneyPlus Features Team | September 17, 2018
Time to read: 6 minutes
When it comes to Australia, there are two things that spring to mind: the lifestyle and the weather (although in summer 2018, UK temperatures have been quite Antipodean for a change…).
But perhaps there’s another reason we need to look longingly towards the southern hemisphere: how they save for life after work.
Australian employees, on average, save four times more into their pension pot each month than their counterparts here in the UK.
This isn’t a new thing. For a quarter of a century, the ‘superannuation guarantee’ has meant that, by law, Australian employers have to make contributions into a retirement account, or ‘super’, for any workers who qualify.
Saving enough to live comfortably
At the moment, employers in Australia make contributions of 9.5% of their employees’ gross earnings, rising to 12% by 2025.
That’s a decent way to build savings.
Compare this to the combined 5% being paid into UK workers’ retirement pots by both employees and employers since auto-enrolment began just under six years ago.
On its own, this is unlikely to be enough to provide the comfortable retirement people aspire to and the UK is now taking the lead from Australia by increasing these minimum contributions to 8% from April next year. However, this will include a minimum 3% contribution from the employer (though they can choose to pay more), whereas the Australian 9.5% is all employer contributions.
Leisa Higgins, 51, is Australian and lives and works in Brisbane in the financial sector. She points out that as well as compulsory superannuation, “people are also encouraged to make voluntary contributions, including diverting their wages or salary income into superannuation contributions under the so-called salary sacrifice arrangement, which is tax friendly”.
Pensions really are a hot topic
Australians stand out globally as early adopters of retirement saving. It’s as much a part of day-to-day conversations as house prices, energy bills and the weather are here in the UK. Aussies will often talk openly about what they’ve built up in their ‘pot’ and how their investments are performing.
Just as we can choose where our pensions are invested in the UK, Australians have the choice about which funds their ‘super’ is invested in. But for Australians, it’s a topic as hot as the weather: comparison websites and newspapers often announce the ‘top ten’ best-performing ‘super’ funds. That’s very different from the UK, for now at least.
And the saving doesn’t start at 22 either (although the UK auto-enrolment age limit is expected to be 18 by the mid-2020s) – even teenagers in Australia get into the saving habit early in life as they must save into a ‘super’ if they earn over $450 and work more than 30 hours a week.
That means they’re likely to have decades to save, giving them a good chance of building up some decent savings to help make their money last as long as it needs to in retirement.
Men – and women – at work
While Australia’s ‘built-in’ savings culture lays good early foundations for a lifetime of saving, Leisa thinks both countries share a common challenge in encouraging young people to actively engage with their savings and planning for their future.
“As far as the younger generation are concerned, they don’t think about it, as from the time they start work, mandatory payments are made for them and retirement is not something they think about or talk about.”
Or not for a while, perhaps.
“They take it that the money will be there when they need it. However, once married and with families, they start to pay more attention.”
For younger people, there’s also a need to rely less on the means-tested ‘Age Pension’, as the state pension is known in Australia, which might not be around when they reach retirement age. It’s their ‘super’ which will provide the bulk of their retirement income.
Australia plans to increase its state pension age far more swiftly than the UK: proposing that the qualifying age increases from the current 65 to 70 by the mid-2030s.
Looking to the future
So, we can look to the ‘super’ system for some lessons here – particularly when it comes to contribution increases. Of course, here in the UK we have a choice whether to save into a pension or not, and you should remember that a pension is an investment and its value can go down as well as up and may be worth less than was paid in. ‘Down under’ they don’t have the choice. So whilst Australians are obliged to save for their future, here we’re encouraging people to ‘own’ their future.
As Leisa explains, “Education is the key and if I could, I would definitely be starting more conversations around the subject of retirement and pensions.”
Education and understanding is vital, but in the UK we’re also going a step further by encouraging people to take control of their own saving. Instead of making it law, we are hopefully creating an engaged saving mindset.
The good news is that the number of people saving into their workplace pension here in the UK is growing. In fact, almost ten million people are saving this way, which has opened up saving to people from all walks of life.
There’s still a way to go before we’re talking about our pension pots instead of the weather, for sure. But there are certainly a few Australian habits we should say ‘G’Day’ to – getting a clearer idea of how much you might need for life after work, starting early and saving as much as you can afford to.
Find out how your retirement savings are shaping up using our simple pension calculator, read our guide to investment, or find out more from the Money Advice Service, which has great information on starting out and saving throughout your working life.
Talk it through with your adviser if you have one. And, if you don’t, you can find one on unbiased.co.uk or we have a financial advisory business 1825 (bear in mind an adviser will charge for advice). After all, there is a lot to look forward to.
A pension is an investment and its value can go down as well as up and may be worth less than was paid in.
The information here is based on our understanding in August 2018 and shouldn’t be taken as financial advice.