Personal Finance & Money Asked on April 13, 2021
In the USA one needs to have accumulated 40 credits in order to become eligible for social security. Does the UK have a similar credit system? What are the eligibility criteria for UK social security? Also, can the UK social security money be received anywhere in the world?
Social security in the USA is a government pension that one can choose to receive any time after age 62. For this pension, one needs to pay a certain percentage of one’s annual wages (typically, 6%-7%) as social security tax. For every $1560 of wages in a given year one gets 1 credit for that year, and one can get up to 4 credits per year. One needs to accumulate 40 credits in order to receive this pension. The actual monthly amount of the pension depends on the average of one’s wages when the credits were accumulated. There is some complex formula that they use to determine the amount of this pension.
The later one chooses to have this pension started, the more is the amount of the pension. This is like a defined benefit pension plan (benefits are promised and the responsibility to invest the money in the social security funds lies with the government). Apart from this, one can invest one’s pre-tax dollars in a defined contribution plan (responsibility for where to invest lies with the contributor and benefits are not promised) such as the traditional IRA and the employer sponsored 401(K) with the money being taxed only when withdrawals are taken from the plan, and can invest one’s post-tax dollars into a Roth IRA where they are never taxed – not even at withdrawal. Are there any British equivalents to these?
In the UK, there is the State Pension. This is payable to people who reach State Pension age, which is currently 66 years. It is financed by deductions from salary each month. These deductions are called "National Insurance contributions". They are about 12% of salary for most people. To qualify, you have to have a minimum of 10 "qualifying years" in your contribution record. A qualifying year is one during which you paid contributions (in total over the year) equal to 52 times the contributions payable on the "lower earnings limit", currently £118 per week. You pay contributions if you are working, and you are credited with contributions if you are on State benefits. To get the full State Pension, currently £175.20 per week, you have to have 35 qualifying years. If you have between 10 and 35 qualifying years, your State Pension is pro-rata, e.g. if you have 10 years the calculation is to divide £175.20 by 35 and then multiply by 10 (£61.32). In addition, employers must, by law, provide a pension scheme for employees, and you can pay into these in a way that is probably similar to those US methods.
Correct answer by Michael Harvey on April 13, 2021
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