With Mario Compagnoni by Investing in the UK we have explored the most relevant differences between the UK and Italian pension systems, analysing both public and private pension schemes. An analysis that highlights how different cultural, regulatory and fiscal models influence workers' choices and prospects for future financial security.
When it comes to pensions, each country has developed different systems to ensure economic security for its citizens once they stop working.
In the United Kingdom, the system is divided between state-guaranteed public pensions and private pensions based on contributions or a defined income. In Italy, on the other hand, the system is based on three pillars: compulsory public pensions, collective and individual supplementary pensions.
In this article we will compare the main features of each model, highlighting similarities, differences and tools available to workers to plan their future.
UK pensions are divided into State Pensionthe state-guaranteed public system, and the private pensions, which include Defined Contribution (DC) and Defined Benefit (DB). The key difference is the certainty of income: the State Pension offers a guaranteed minimum amount, DBs a defined future income based on salary and years of service, while DCs depend on contributions made and investment performance.
State Pension
The State Pension is paid to those who accumulate between 10 and 35 years of National Insurance Contributions (NICs), depending on the type of pension (Basic or New State Pension). Missing years can be made up through voluntary contributions. The amount is not linked to final income, but offers a minimum security guaranteed by the state.
Private Pensions - DC and DB
DC pensions are based on employee and employer contributions, invested in an individual fund: the final amount depends on contributions, performance and duration of accumulation. Contributions enjoy tax relief and can be optimised through salary sacrifice, a mechanism whereby the employee gives up part of his or her gross salary in return for an increase in pension contributions, reducing taxable income. Total pension contributions (combined contributions) are subject to the Annual Allowance, with possible carry forward options for unused years.
DB pensions guarantee a defined income at retirement, calculated on salary and years of service, and may be Not Funded, Funded or Notionally Funded, with risk mainly borne by the employer or state.
The pillars of social security in Italy
In Italy, the pension system rests on three pillars that define its structure.
The first pillar is the compulsory social security, the public system that guarantees the basis of the pension for most workers.
The second pillar is the collective supplementary pension, made up of occupational pension funds designed for those who want to supplement their allowance through shared savings.
Finally, the third pillar is individual supplementary pension provision, a set of flexible instruments that everyone can choose to build up extra resources for the future.
1ST PILLAR Compulsory public insurance
La compulsory public welfare in Italy represents the first pillar of the pension system, providing economic protection to workers. For the private and public employeesmanagement is entrusted to theINPSwhich collects mandatory contributions and provides basic pensions, along with other forms of protection such as disability, maternity and unemployment. I freelancers instead are enrolled in professional speakersprivate institutions with a public purpose, specific to categories such as surveyors, engineers, architects, doctors, lawyers, notaries and accountants. In this way, the compulsory public system covers all the main categories of workers, ensuring adequate pension treatment for each.
2ND PILLAR Collective supplementary pension provision
In Italy, the collective pension funds allow workers to supplement their public pension through shared savings. They mainly fall into two categories. I negotiated funds are intended for specific groups of workers and arise from the collective bargainingboth at national and company level; for example, the Comet Fund is aimed at workers in the metal sector. I pre-existing pension fundsin contrast, were established before 1993 and also only accept collective memberships. Both offer a structured way to plan for the future, often with additional employer contributions.
3rd pillar Individual supplementary pension provision
In Italy, the individual supplementary pension provision offers flexible solutions for those who want to build up a supplementary pension independently. Among the main options are the open-end fundsoffered by banks, insurance companies, asset management companies or stockbrokers, which can take both individual and collective subscriptions. I Individual Pension Plans (PIP), on the other hand, are insurance products designed exclusively for individual membership and allow the individual to choose his or her own investment and accumulation strategy for the future. Both solutions are practical tools for planning retirement beyond the mandatory public system.
Although the UK and Italy have different approaches to pension provision, both offer tools to build a secure retirement but also a peaceful old age. In the UK, the combination of State Pension and private pensions (DC or DB) allows you to modulate your savings and benefit from tax breaks, while in Italy the three-pillar system allows you to supplement the state pension with collective funds or flexible individual solutions. Knowing the rules, the contributions required and the opportunities for optimisation is crucial, both for those living in either country and for those considering a move.
Authors
Salvatore Longo
Mario Compagnoni
