The UK State Pension is a regular payment you get from the government if you’ve paid enough National Insurance over your working life.
It’s a valuable source of income when you retire, but how does it compare with pensions in other European countries?
[top_pitch]
How much is the UK State Pension?
The UK State Pension rises every year in line with whichever is the highest of inflation, average earnings or 2.5%. This is known as the triple lock. This year, the State Pension increased by 2.5% as it was the highest of the three factors.
As a result, pensioners who receive the full new State Pension will get £179.60 per week in 2021, up from £175.20 in 2020.
Those who receive the full basic State Pension will see their weekly payments rise to £137.65 from £134.25.
How does the UK state pension compare with Europe?
There are differences between countries in terms of the design and structure of their state pension programmes.
For example, some state pensions are means-tested while others are earnings-related or based on a flat rate. These structural differences often complicate attempts to make meaningful comparisons across European countries.
However, a report from the House of Commons Library shows that the pension systems of Ireland, Denmark and the Netherlands are arguably good European comparators for the UK State Pension system. This is because like the UK, these countries also provide a flat-rate state pension based on the number of qualifying years a person amasses during their working life.
Ireland
Ireland pays a non-means-tested, flat-rate pension to people from the age of 66 who have made enough social insurance contributions.
The full rate is available for those with 48 or more qualifying years. As of 2021, the full pension amount is €248.30 (or £214) per week.
Netherlands
The Netherlands follows a pension system that consists of a basic state pension that is linked to the country’s minimum wage.
A single pensioner gets an amount worth up to 70% of the net minimum wage. A pensioner couple gets the equivalent to 100% of the net minimum wage (50% each).
The pension amounts are revised each January and July, alongside the minimum wage itself.
The pension system is also residence-based. Individuals accrue 2% of the full pension amount for every year they reside in the country between the age of 15 and the pension age (up to a maximum of 50 years).
Currently, the full pension amount stands at €1,218.19 per month (around £260.84 per week) for a single person. For married or cohabiting couples, it is €832.86 per month (£178.33 per week).
Denmark
In Denmark, the state pension consists of a basic amount payable to an individual and a pension supplement. The latter depends on whether pensioners are single or part of a couple.
The flat-rate basic amount, however, can also reduce if a pensioner’s earnings from work are greater than a specific threshold. This apparently affects at least 4% of pension recipients in Denmark.
The pension supplement is subject to a more comprehensive means-test that considers income from all other sources other than pension.
To get the full basic amount, individuals must have 40 years of residence in Denmark between the age of 15 and the state pension age.
As of 2021, the total amount (basic plus pension supplement) is DKK 13,853 per month (£398.87 per week) for singles. For married or cohabiting couples, it’s DKK 10,225 per month (£294.41 per week).
[middle_pitch]
Which EU countries have the best state pension?
That would probably be the Netherlands.
In the 2020 Mercer CFA Institute Global Pension Index that awards national pension systems points for adequacy, integrity and sustainability to achieve an overall score, the Netherlands came out on top with a score of 82.6 followed by Denmark with 81.4.
The UK got a score of 64.9. This is lower than a number of other European countries, including Finland (72.9), Sweden (71.2) and Germany (67.3). However, the score is better than France (60.0), Spain (57.7) and Italy (51.9).
Further, in a 2017 OECD report that compares state pension to average earnings, it was shown that the UK only pays out 29% of pensioners’ previous earnings. That’s considerably less than other countries like the Netherlands (100.6%), Portugal (94%) and Italy (93.2%). It’s also lower than the average rate of all OECD countries which is 63%.
Bottom line
Comparative figures suggest that there several countries in Europe that provide a more generous state pension than the UK.
Does that mean that UK pensioners are faring worse than their European counterparts? Not necessarily. A large number of UK pensioners also get retirement income from other sources including workplace pensions and personal savings which help to even things out.
