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I’ve been working to educate myself on the US pension system, particularly the retirement decumulation landscape. It’s a challenging endeavor, but through diligent research, I’m slowly grasping the essentials. From an outsider’s viewpoint, the complexity that various US administrations have introduced into this system is striking. As a UK citizen, I find several aspects particularly perplexing:
The Sheer Number and Variety of Retirement Accounts: In the UK, it’s largely about defined contribution and defined benefit pensions, perhaps with an ISA. Here you have 401(k)s, IRAs (traditional and Roth), 403(b)s, TSPs, and more. Each with its own set of rules, contribution limits, and tax implications. It’s a dizzying array to get your head around.
The Reliance on Individual Responsibility for Healthcare Costs in Retirement: For me, the prospect of individual responsibility for healthcare costs in retirement is, by far, the biggest and most frightening aspect. While our NHS certainly has its challenges, the idea of having to factor in potentially enormous healthcare expenses and insurance premiums as a significant part of retirement planning is a foreign and frankly daunting concept. It adds another layer of financial anxiety that many in the UK simply don’t face to the same extent.
Being Forced to Take Money from Your Accounts Through Required Minimum Distributions (RMDs): In the UK, while there are rules around accessing your pension, the concept of the government dictating that you must withdraw a certain amount from your retirement accounts once you reach a specific age, regardless of whether you need the money or not, is quite alien. The idea of penalties for not taking money out feels counter-intuitive to long-term saving.
The Concept of “Decumulation” Itself Being Such a Prominent and Complex Field: In the UK, while financial planning for retirement is difficult and important, the “decumulation” phase seems less like a distinct academic discipline and more integrated into general financial advice. The emphasis on strategies for drawing down funds, managing sequence of returns risk, and navigating these mandatory distribution rules feels like a far more elaborate puzzle here.
This isn’t a criticism of US citizens at all. In fact, it’s my way of expressing admiration for how adept you all seem to be at navigating such a Byzantine and, dare I say, often dysfunctional system. With that in mind, I say “well done” and “hats off” to you all for coping with such a hodgepodge of legislation. You have my admiration, but I’m glad I’m not saddled with such complexity and anxiety over healthcare and pensions in my retirement.
Yup the US doesn’t really like to keep things simple. But as I’m sure you know most people don’t actually participate in savings and investment. Is it different where you reside?
I think in the US it’s around 2/3s of people that regret not planning more for retirement.
I’m not really sure. But my direct experience enrolling employees into a pension scheme was enlightening. I encouraged them to log in and consider moving from the default investment into a more internationally diversified offering. Despite my best efforts, I found they simply weren’t bothered to make the change, and I eventually stopped trying.
You think US retirement saving and decumulation are complicated? Don’t take a look at the tax system. It’s ridiculous. It took me minutes to fill in a UK tax form, here it can take days, or a few hundred dollars paid to a tax accountant.
I use TurboTax, I put the forms I receive on the table organized by type and I’m done in a hour or less. It could be less but I haven’t gotten yet to trust TurboTax downloading directly from my bank and Fidelity, but it could.
It actually works better when I download, but I also check every single entry so it’s not a time savings
Nope, not touching that with a ten-foot pole.
So in short, we in the USA have more retirement investment options than do you in the UK? Are not more options a better thing?
My post reflected an outsider’s observations of differences, not a critique. More investment wrapper choices can absolutely be better, but only if you fully understand all their implications.
Actually, I don’t think so. More options are more confusion, more “did i make the right choice?”
We need only two options, before tax or after tax plans. All plans should be the same, employer based or not and all should have the same limits on contributions.
Sorry I didn’t see your reply
So, in Britain, when you are putting funds into your pension of whatever variety, what investment choices do you have? Can you invest in equities, or must you settle for a fixed rate of return?
An employer scheme usually has a choice of equity and bond funds (but not the full market) and will (in modern ones) offer a default lifestyled option to reduce equity exposure at older ages. A Self Invested Personal Pension (SIPP) basically allows you to select from whatever funds and individual equities offered on the platform. You can migrate an employer scheme into a SIPP (which people often consider when employers are no longer contributing if they are appropriately savvy).
As I understand it, the SIPP is not as well-regulated as a brokerage IRA in the US. IRA custodians here are required by law to limit the types of investments you can put in your IRA, and it is difficult (although not impossible) for those offering dubious or frauduent investments to get them on the approved list.
Thank you!….Now, historically how have British equity investment funds preformed since 2000? And, among the investment choices can you choose international funds?
Yep – I generally pick global. Clearly having a US bias would have been even better but given it makes up 60%+ of global trackers I don’t figure a bit of diversity harms me.
Personally I just use a vanguard developed world tracker. No idea about the UK portion, it’s not detailed separately. I think UK only makes up 5% of the fund .
I just logged into my vanguard account…..77.25% for 5 year returns . That’s an annualised 12.27%
How on earth does answering a purely factual question get negative votes? If people want me to stop posting Have Jonathan let me know and I’ll happily do so.
Welcome to my world. How indeed?
Although our underlying investment options are substantially similar, US citizens have far more choices when it comes to investment wrappers.
Mark, I would gladly trade our plethora of account and fund wrappers for the UK rail system and London Underground. Over two weeks we recently travelled from one distant part of Britain to another, and took several day trips from London, all on rail, with no fuss.
David you would love this. When you turn 60 all public transport on the island of Ireland is free. It’s going to be the one bright spot on my 60th birthday 😂
Free? What’s your standard VAT, 23%🇮🇪 Ain’t nothing free😁
I reject your reality and substitute my own 😊
I like your “free” healthcare too.
Me too, haven’t paid a penny in 40 years of working 😇
And paying nearly $5 for a US gallon of gas is obviously normal….no tax there I would think 🤔
There is tax. Varies by state. I paid $2.99 a gallon last week, which was up from before the Israeli attack on Iran.
Our one trip on rail in the Republic was not great, though perhaps just bad luck. Great experiences with the LUAS in Dublin.
Does that apply to visitors as well? I know visitors can buy a Senior Railcard on the “mainland”.
Unfortunately no, you need a postal address within the island. Although my father in law who lives in Spain has one using our address.
Seems to me that’s fair, given it’s your taxes that fund the system. I was surprised I could buy the Railcard.
You are certainly right about the unnecessary variety of retirement programs. The different limits among them is ridiculous in my opinion.
However, it all boils down to DC or DB. The defined benefit pension is all but gone in the private sector.
Right again about health care and right now we are in the process of making it worse for many people.
The main problem in terms of retirement is for those retiring before age 65. After that age it’s pretty simple, you can eliminate virtually all out of pocket costs, but with pretty high premiums.
My retired friend in England insists his coverage is free given he pays no out of pocket costs or premiums. He doesn’t want to hear it when I point out he paid for it all in taxes his working life. On the other hand, his wife just waited almost a year for a hip replacement.
The withdrawal requirement is simply a tax issue, no taxes paid on the money going in, but the government wants its share before we die. Of course, make your contribution with after tax money and there is generally no such requirement, plus with a Roth account no taxes. Why everything is not of the a Roth type is a good question. We tend to complicate everything.
I’m sure many Americans are more confused than you are. Our aversion to paying taxes comes back to bite us in the end. Now there is a social media obsession with no taxes to be paid by anyone 65 and older or no property taxes for retired individuals as if those lost revenue didn’t need to be replaced.
‘’Even if it isn’t, what you say is a valid criticism.
I’m definitely aware that we pay higher taxes, and healthcare is one of the main drivers for this. It’s a social contract I’m happy to pay for, although the delivery of service is deeply concerning in some specialties.
Thanks for an interesting article. As an Australian, we basically have one system – compulsory superannuation. Every working Australian contributes to their “super” fund at a rate of 12% of their normal time pay (excluding overtime). I agree that the relative complexity of the US system seems pretty scary.
The challenge for the Australian superannuation system is now the de-accumulation phase. Our system is only around 30-40 years old, so there haven’t been lots of people drawing down on their retirement funds – until now. There seems to be a general feeling that we need better structures in place to help retirees draw down their retirement savings in a way that is financially prudent, and helps them have a happy and rewarding retirement.
Not to mention the impact this will have on the economy. Investments are sold and used to buy goods and services; but who is buying the investments, and who is providing the goods and services? If older people are able to get money from their accounts, and use more goods and services, then everyone else is going to have to use less.
No annuity option? Is here a guaranteed investment return on the fund?
Mr. Quinn, I don’t think that any of our super funds offer annuities at the moment. In theory, one could withdraw all their super balance and buy an annuity, but I think many would find that a bit complex and scary.
Many are advocating for super funds to have an annuity as a simple option that retirees can choose, if they wish, for the de-accumulation phase.
For a much better explanation:
https://grattan.edu.au/news/annuities-would-take-the-stress-out-of-retirement/
Don’t forget the income tax side as well with a myriad of tax breaks/deductions that differ with who and where you are.
The biggest thing overall that stands out for me is the US capital gains step up on death and the high inheritance tax thresholds compared to the UK. It may be more complicated getting there but it’s certainly a lot easier passing on wealth.
Don’t forget we could get RMDs in the UK if a government see juicy DC pots as something they’d like to accelerate or increase tax on.
No system is immune from political tinkering, which when it comes to retirement assets is always worrying as long term prudent planning can be frustrated.
This post is intentionally concise and doesn’t delve into every aspect of the system. My aim was simply to share my initial thoughts in an easily digestible format, not a comprehensive analysis.
That’s fair enough. Doesn’t mean the complexity of the US system is all negative though – seems to be pretty generous to those who tuck a lot away – RDQ’s recent post on his effective tax rate brought that home to me.
Keep in mind, I have a pension and a 401K and brokerage account investments. As you well know little about me is normal or perhaps typical.
Americans have been taught to hate taxes since the Boston Tea Party in 1773 and even today most can’t make the connection between taxes and what they provide us.
Nor do we understand how relatively low our taxes are compared with the rest of the developed world. The top 1% have an effect tax rate on average of 26%
40% of Americans pay no income tax. Even our payroll taxes are too low to support retiree income and health care. SS and Medicare.
Despite our disagreements on the worth of planning and modelling in order to better understand our resources and our options, I do agree with you that low personal taxes and corresponding high costs in other areas are likely a significant long term problem for the US.
I don’t see how 40% of the population not paying income tax can be possibly sustainable unless those people are all retirees on poverty level SS.
As for UK it could be worse – until recently we had a punitive rule that imposed excess tax if your DC pension pot through investment growth happened to get above around $1.7m. So you got hit by a penalty tax and then still had to pay full income tax on withdrawals. To my mind this was set far too low and effectively hit those who were merely able to enjoy a comfortable lifestyle and was an extra tax on investment success not tax avoided on entry.
Yes, it’s sustainable; we have a large number of people with truly gigantic incomes, compared to the UK. They pay for everything.