As more young New Zealanders head to the UK for work, it’s crucial they understand and take full advantage of the UK’s automatic pension enrolment system. For those familiar with KiwiSaver, the UK’s pension scheme might seem similar, but there are key differences that can significantly benefit your retirement savings.
The Basics of Automatic Pension Enrolment in the UK
In the UK, employees are automatically enrolled in a workplace pension scheme if they earn over a certain threshold (£10,000 annually as of the latest rules). This pension contribution is deducted directly from your salary, making it a seamless way to save for retirement. Like KiwiSaver in New Zealand, the system requires both the employee and the employer to contribute to the pension. In the UK, the minimum employer contribution is 3% (like KiwiSaver in New Zealand). The employee needs to contribute 5%.
How It Works: A Real Example
Let’s take an example of someone earning £60,000 a year in the UK. With automatic pension enrolment, they will contribute 5% of their salary to the pension scheme, which amounts to £3,000 annually. Additionally, their employer contributes 3% or £1,800. If you don’t enrol in a pension you will not receive the employer contribution and you will simply receive your contribution as salary.
While the pension contributions reduce the immediate weekly cash in hand by just £35 (about the price of a daily coffee), the long-term return is substantial. After just one year, the pension fund would have £4,800 in contributions. As you only sacrificed £1,800 in the hand this is an impressive return of 167%.
| No Pension | Pension | |
| Income | £60,000 | £60,000 |
| Employee Pension Contributions | £0 | £3,000 |
| Employer Contributions | £0 | £1,800 |
| Income After Tax | £45,408 | £43,608 |
| Change in Cash in Hand | £0 | -£1,800 |
| Weekly Cash in Hand Less | £0 | -£35 |
| Pension Fund After One Year | £0 | £4,800 |
| Return on Investment | 0% | 167% |
The Extra Comes From Tax Breaks and Employer Contributions
In the UK, there are significant tax advantages to contributing to a pension scheme. Unlike New Zealand’s KiwiSaver, where contributions are made from after-tax income, UK pension contributions are tax-free for both employees and employers. This means that you save more money, without additional tax deductions. So the UK system more generous than KiwiSaver in New Zealand.
It’s also worth noting that many UK employers offer matching contributions (so more than the 3%), meaning for every pound you contribute, they may match that amount or even contribute more. This is an excellent opportunity to boost your savings without any extra cost to you.
Flexibility and Accessibility
One of the key differences between the UK and New Zealand pension systems is the access age. In the UK, you can start accessing your pension at age 55 (or 57, depending on when you were born), offering greater flexibility in retirement planning. In contrast, KiwiSaver in New Zealand doesn’t allow access until you turn 65.
Transferring Your UK Pension to New Zealand
Another benefit of the UK pension system is that you can transfer your pension to New Zealand tax-free when you return to New Zealand. This allows you to move your savings without penalties or tax implications, enabling you to access your pension in New Zealand without losing any money.
Kiwis Should Be Joining in Droves
We get lots of questions from young Kiwis asking what they should do when it comes to pensions in the UK. Our advice is always the same: take the free money on offer. Through auto-enrolment you can give up a small part of your post tax earnings to:
- Force your employer to contribute to your future wealth
- Get amazing tax breaks in the UK
If you save for a couple of years you could be transferring $20,000 plus to New Zealand in the future. The employer contributions and tax breaks are essentially free money, it’s a no-brainer.
Conclusion: A Simple Investment for a Secure Future
For New Zealanders working in the UK, automatic pension enrolment is an opportunity not to be missed. While you may notice a slight dip in your weekly cash flow, the long-term benefits, tax advantages, and employer contributions make it a smart and low-risk way to save for retirement. The ability to access funds at a younger age and transfer them back to New Zealand without penalty makes it an even more attractive option.
Talk to us today if you need any help.
