Pensions, savings: we aren’t making the most of our salaries

We enjoy some of the highest take-home pay in Europe, yet our pension and saving position lags behind our peers.

When it comes to paying tax on your income, UK workers have a pretty good deal.

A new study by Income Tax UK ‒ a website that allows people to calculate their net salary ‒ has broken down how different nations in Europe compare when it comes to take-home pay.

It looked at how someone earning €3,000 (or £2,580) would be taxed across 33 different EU countries, plus the UK.

And it found that the UK ranks eighth of the nations included in the study, with Brits taking home £2,058 of that monthly pay packet.

Workers in Bulgaria take home the biggest slice of their pre-tax pie, thanks to a flat tax rate of just 10%, ahead of Poland where workers keep £2,226 and Ireland at £2,120.

At the other end of the spectrum, workers in Lithuania hand a huge chunk of their earnings over to the taxman, as they are left with just £1,506 to spend.

This is only slightly worse than Romania at £1,509, and Portugal at £1,578.

Where did all the money go?

There’s no shortage of demands on that post-tax cash though, particularly at the moment. But it’s fair to question whether we are using it properly.

For example, those incomes aren’t leading to similarly comfortable retirements.

New analysis by The Investing and Saving Alliance (TISA) crunched numbers from the Organisation for Economic Co-operation and Development (OECD), looking at how the UK’s mandatory pension provision compares to other OECD nations. 

And it makes for worrying reading.

According to the study, the UK’s net replacement rate ‒ essentially how the pension income compares to your pre-retirement earnings ‒ is a paltry 28.4%.

That puts us bottom of all OECD nations and works out at less than half the OECD average of 58.6%.

Things get better when you turn to the voluntary pension schemes, in other words, the schemes that we opt into paying into, where the replacement rate jumps up to 61% compared to the OECD average of 65.4%.

TISA reckons that the way to boost this is by upping the auto-enrolment minimums to 12% of salaries from their current level of 8%.

This would mean a replacement rate of 77% and put us 12th of the OECD nations.

Saving for a rainy day

Having some money set aside in savings is undoubtedly a good idea.

That cash can help you cover the cost of home refurbishments, a dream holiday or provide you with a crucial safety net should your circumstances change.

The trouble is huge numbers of us don’t have much, if any, savings to speak of.

New data out this week from the Department for Work & Pensions (DWP) revealed that before the pandemic hit, more than one in 10 (11%) households had no savings to speak of.

Meanwhile, around half of families had less than £1,500, which let’s be honest isn’t going to go very far.

Changing our attitude to saving

Increasing those pension minimum contributions makes sense.

Auto enrolment has been a success because it takes the effort out of starting pension saving, and while contributions have been at relatively low levels plenty of workers haven’t even noticed the money disappearing each month.

And there have been suggestions that a similar programme could encourage more people to start regular savings pots too.

But there is a danger that increasing them again will prompt people to simply opt out.

They may not notice the current contribution levels, but given the financial pressures that many are under, the extra few quid each month will be difficult to ignore.

The real key then will be changing our attitude towards saving, whether for retirement or just for a rainy day. However, that will likely be easier said than done.

*This article contains affiliate links, which means we may receive a commission on any sales of products or services we write about. This article was written completely independently.