With the fear of unfunded retirement becoming quite the actuality, many folks are beginning to turn to additional monthly or yearly contributions to their lifetime savings. However, in many cases the system seems to be working against retirees. Some large employers are choosing to put a yearly cap on pension contributions. In addition, lifetime contribution caps have been in serious talks with the US government for the last few years. For employees hoping to retire comfortably, it could mean living a drastically different lifestyle than what was anticipated. Are employees truly being scammed out of a life savings?
Lifetime Cap Possibility
The US treasury has discussed limiting pension accounts to a maximum lifetime amount of about $3.4 million dollars per married couple. This isn’t an exact amount, but basically it is an estimate of the $210,000 dollar cap that the IRS will pay out for a retired married couple per year for the entirety of their retirement. The argument against this limit is the fact that living costs are drastically different depending on where the retirees reside. For instance, someone who lives in New York City versus rural North Dakota might see quite a difference in that $210,000 dollar distribution per year.
For many Americans that sum would be more than enough to live comfortably for the duration of their retirement (As a comparison, the average American household makes under $55,000 per year). Nevertheless, others may be decidedly against living a less than “rich” lifestyle for the remainder of their days – which undoubtedly every worker who has punched their 50+ years of work service has earned . It all comes down to preference.
UK pension contributions have been capped at a lifetime amount of 1.25 million pounds per person. Yet, in April 2016, this amount will drop to about 1 million pounds, which equates to about $2,862,200 million per married couple in the US. According to the same estimated calculations as above, each UK married couple would essentially be awarded about 125,000 pounds ($178,887 US dollars) per year of their retirement (Again, to put this into perspective the average UK household earns about 55,062 pounds per year, which is about $78,799 US dollars). So, in comparison the proposed pension plan limits for the US are not far off from what at least one other developed country is currently executing.
Yearly Cap Reality
What’s more, the UK is passing a law (also in April) stating that employees making 150,000 or less on their yearly income can make up to 40,000 pounds in yearly contributions. Although, any annual earnings more than 150,000 pounds will result in yearly pension contributions being tapered down to 10,000 pounds per year once the annual income meets 210,000 pounds. Still, about one in five large companies has decided to cap all employees contributions at 10,000 pounds per year no matter the current yearly income.
The companies believe that this course of action will result in fair treatment for all employees as well as ease of work on the company itself. This way, companies do not have to track the income of all of their employees. Some employees may be receiving outside income that is quite difficult to keep track of. Needless to say, those who work for such a company may be getting the short end of the stick. If the lifetime “goal” or cap is set at 2 million pounds per household, a household might be able to reach 1 million pounds accumulatively after 50 years of work and savings – that is if the employee is able to actually contribute 10,000 pounds per year.
In the US the annual retirement contribution limit has been set at $18,000 dollars for 2016. So, that means we are talking about $1,800,000 million dollars per household after 50 years of work if the employee can contribute the full amount every year.
Of course, all of this is dependent on tax rate fluctuation and government decisions. Most professionals are predicting that lifetime and annual pension contribution limits will only decrease over time. With that being said, now is the time to start thinking about your future and the future of your retirement funds. There is no better time to begin saving because who knows what the horizon holds for pensions in the succeeding years.
Photo: Flickr: GotCredit