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I'm not familiar with the US, but in the UK, generally pension contributions seem like a total scam to me. As an individual, there is no possible reason why I

I'm not familiar with the US, but in the UK, generally pension contributions seem like a total scam to me. As an individual, there is no possible reason why I would want my money to sit in a retirement fund over just having it now. I am perfectly capable of investing it as I please, in housing, in stocks, in gold, in starting a business, without having it artificially withheld from me. There seems to be this idea that I'd just be spending it on booze and fags or something. Individuals generally don't waste all of their money unless they feel saving is hopeless. Pension funds are an arbitrary restriction on that. I can much more readily leverage my intellectual and social capital if I have cash in hand and that will almost certainly result in a better outcome at retirement.

kspaans 11y ago
(Disclosure: Canadian living in the UK) Pension contributions are restricted because they are tax-deferred. You avoid paying income tax on the money you put in the pension. That money will also grow tax free, but you will pay normal income tax on it again when you take it out. The age limits on withdrawals are to incentivize long-term savings, I suppose. It's one way the government can incentivize savings, there definitely could be other ways. If you want to invest your after-tax earnings, you can do that however you please (including investing inside of a tax-free ISA).
maxxxxx 11y ago
I can see the value of a tax deferred savings plan but in the US your employer picks a 401k administrator who then charges fees and gives you a limited selection of investment choices. This is the same nonsense as employer-based health insurance in the US. Your employer picks or gives you limited choices for a plan. Although the employee's future is at stake he has no input in these choices.
rik1shah 11y ago
In the US, the biggest advantage is the tax shelter built into both 401(k)s and IRAs. You contribute pre-tax dollars to a "Traditional" account, and pay ordinary income-tax on qualifying withdrawals. You contribute post-tax dollars to a "Roth" account but your investments grow tax-free (much like an ISA in the UK). The tax benefits of each account are equivalant, all else being equal. For example: if you contribute $8k/year pre-tax (or $6k post-tax), to an account with 8% annual returns over 30 years, and are a 25% federal tax payer, a tax-sheltered account would leave you $167k better off, than a non-tax sheltered account. These tax shelters can be an incentive to save for retirement, and hopefully avoid missing out on compounded growth.
stegosaurus 11y ago
Replying to all below posters: Yes, I know that there exists a tax deferral. Sometimes employers even match funds. The statement I am making is that this seems like a complete scam by the Government - forcing you to perform suboptimal manoeuvres by withholding your cash otherwise. Is it worth participating to reduce taxes? Possibly. Does it outrage me that I'm treated like a child in this respect? Certainly. (Why age 55? What if I want to retire at 50? What if I'd rather take a year out now and work 55-56? What if I want to leave the country? What if tax rates change?)
- kspaans 11y ago
  That's a good question actually. In Canada you can withdraw from your RRSP early if you want, but you get hit with something like a 25% "don't do that" fee. What's the reason for this lock-in? I can't see one other than to try to encourage you to keep your money in the plan for the long run.
Rainymood 11y ago
>I can much more readily leverage my intellectual and social capital if I have cash in hand and that will almost certainly result in a better outcome at retirement. I doubt it. Would you have predicted the rise of HelloFresh, Snapchat, Uber, 20 years ago? Really doubt it. Besides, not all people in the world (read: everyone but you) is this "smart", especially about delayed gratification. Hell! I recently wrote a small paper and I found some striking results that almost 40% of Americans start saving for their pensions after 40! That is way way way too late. I studied actuarial sciences and around 80% of your final retirement savings is due to accrued interest. It's huge.

kspaans 11y ago

(Disclosure: Canadian living in the UK) Pension contributions are restricted because they are tax-deferred. You avoid paying income tax on the money you put in the pension. That money will also grow tax free, but you will pay normal income tax on it again when you take it out. The age limits on withdrawals are to incentivize long-term savings, I suppose. It's one way the government can incentivize savings, there definitely could be other ways. If you want to invest your after-tax earnings, you can do that however you please (including investing inside of a tax-free ISA).

maxxxxx 11y ago

I can see the value of a tax deferred savings plan but in the US your employer picks a 401k administrator who then charges fees and gives you a limited selection of investment choices. This is the same nonsense as employer-based health insurance in the US. Your employer picks or gives you limited choices for a plan. Although the employee's future is at stake he has no input in these choices.

rik1shah 11y ago

In the US, the biggest advantage is the tax shelter built into both 401(k)s and IRAs. You contribute pre-tax dollars to a "Traditional" account, and pay ordinary income-tax on qualifying withdrawals. You contribute post-tax dollars to a "Roth" account but your investments grow tax-free (much like an ISA in the UK). The tax benefits of each account are equivalant, all else being equal. For example: if you contribute $8k/year pre-tax (or $6k post-tax), to an account with 8% annual returns over 30 years, and are a 25% federal tax payer, a tax-sheltered account would leave you $167k better off, than a non-tax sheltered account. These tax shelters can be an incentive to save for retirement, and hopefully avoid missing out on compounded growth.

stegosaurus 11y ago

Replying to all below posters: Yes, I know that there exists a tax deferral. Sometimes employers even match funds. The statement I am making is that this seems like a complete scam by the Government - forcing you to perform suboptimal manoeuvres by withholding your cash otherwise. Is it worth participating to reduce taxes? Possibly. Does it outrage me that I'm treated like a child in this respect? Certainly. (Why age 55? What if I want to retire at 50? What if I'd rather take a year out now and work 55-56? What if I want to leave the country? What if tax rates change?)

kspaans 11y ago
That's a good question actually. In Canada you can withdraw from your RRSP early if you want, but you get hit with something like a 25% "don't do that" fee. What's the reason for this lock-in? I can't see one other than to try to encourage you to keep your money in the plan for the long run.

Rainymood 11y ago

>I can much more readily leverage my intellectual and social capital if I have cash in hand and that will almost certainly result in a better outcome at retirement. I doubt it. Would you have predicted the rise of HelloFresh, Snapchat, Uber, 20 years ago? Really doubt it. Besides, not all people in the world (read: everyone but you) is this "smart", especially about delayed gratification. Hell! I recently wrote a small paper and I found some striking results that almost 40% of Americans start saving for their pensions after 40! That is way way way too late. I studied actuarial sciences and around 80% of your final retirement savings is due to accrued interest. It's huge.