Shoken Keizai Kenkyu No. 122 (June 2023)
How to design Japan’s DC Pension Plan (iDeCo) and the NISA?:A Comparison with the U.S. and the UK
Eiji Tajika
Tadao Yamada
Abstract
The aging of Japanese society makes it difficult to sustain the payment of public pension benefits atcurrent levels. Therefore, the private pension system is becoming more important as format for asset
building post-retirement. The individual-type defined contribution pension plan (iDeCo) provides
support for the system from a tax incentive point of view. Japan also has the Nippon Individual Savings
Account (NISA) for small tax-exempt savings.
In the U.S., traditional IRAs and Roth IRAs are an additional format for household asset building,alongside public pensions and corporate pension plans, such as 401(k)s. In the UK, the ISA savings
program is a supplement to public and private pensions and is the model for Japan’s NISA.
This paper compares the systems of Japan, the U.S., and the UK, with a focus on the benefits and income
redistribution effects of public pensions and the contribution limits of private pensions and other asset
building systems. The following characteristics of the Japanese system stand out from a comparison ofthese three countries:(1) The public pension in Japan is positioned to provide support for post-retirement life, but the actual
amount of benefits paid is quite low.
(2) The income redistribution effect of public pensions is also limited.
(3) Contribution limits for asset building schemes are lower than those in the U.S. and the UK. The
contribution limit for private pensions is particularly low.
Based on these results, this paper points out there is a need for a review of the role of public pensions
and the contribution limits of private pensions.
Keywords: Public pension, private pension, iDeCo, NISA, tax-exempt contribution limit
Contents
1. Introduction
2. The Japanese Pension System
2.1 Public Pensions
2.2 Private Pensions
2.3 NISAs
2.4 Characteristics of Japanese Public andPrivate Pensions

3. The U.S. Pension System
3.1 Public Pensions
3.2 Corporate Pensions
3.3 IRAs (Individual Retirement Account)
3.4 Characteristics of Public and Private
Pensions in the U.S
4. The UK Pension System1

4.1 Public Pensions
4.2 Private Pensions
4.3 ISAs
4.4 Characteristics of Public and Private
Pensions in the UK

5. Implications for the Corporate Pension Plan
(iDeCo) in Japan and the NISA
Appendix: Method of calculating annual DB
contributions in the UK

1. Introduction
The aging of Japanese society has made it
increasingly difficult to sustain payments ofpublic pension benefits at current levels. Thismeans that the private pension system is
becoming more important as a structure forasset building for retirement. The “individualtype defined contribution pension plan”(iDeCo) provides support for this system in theform of tax-exempt saving. Japan also has the
Nippon Individual Savings Account (NISA) forsmall-scale tax-exempt savings. These schemes
need to be considered on an integrated basis todetermine the optimal approach to encouraging
asset building for retirement.

The principal results of the comparison of thethree countries are summarized in Figs. 13 and14. The following characteristics of theJapanese system are evident from thiscomparison.
(1) The public pension in Japan is positioned toprovide support for post-retirement life, but theactual amount of benefits paid is quite low.
(2) The income redistribution effect of public
pensions is also limited.
(3) Contribution limits for asset building
schemes are lower than those in the U.S. and the
UK. The contribution limit for private pensions
is particularly low.

In the U.S., the role of public pensions is tofacilitate income redistribution in retirement.
Corporate pensions, on the other hand, help
people build assets for their retirement on a selfhelp basis and offer large tax-exemption
benefits. The U.S. also has the IRA program(Individual Retirement Account) for retirementsavings, as well as the Roth IRA, whichcorresponds to the NISA in Japan. However, thetax-exemption limit is much lower than inJapan.

Based on these results, this paper highlights
out the need for a review of the role of public
pensions and the contribution limits of private
pensions.
Chapters 2-4 describe the structure of thepension systems in Japan, the U.S., and the UK.
Chapter 5 includes a comparison of the three
countries and examines the Japanese approachto support for asset building for retirement. In
the UK, there is a common contribution limit
for both defined contribution (DC) and defined
benefit (DB) private pensions. For DB pensions
it is necessary to calculate an annual
contribution
equivalentamount.
This
calculation method is explained in the appendix.

In the UK, public pensions are also structured
to facilitate redistribution of post retirement
income. Compared to Japan, private pensions
have quite radical tax-exemption benefits. The
UK also has the ISA (Individual Savings
Account), which is a model for Japan’s NISA.

2. The Japanese Pension System
This paper compares asset building support
programs in Japan, the U.S. and the UK with afocus on the benefits and redistribution effectsof public pensions and the contribution limits ofprivate pensions and other asset-building
support programs.

2.1 Public Pensions
Fig. 1. shows the general structure of Japan’s
pension system: the system has both private
pensions, including corporate pensions, as wellas public pensions. The overall pension system
can be said to have a “three-tier structure.”2

Fig. 1: Structure of Japan’s pension system
iDeCO
Tier 3Tier 2Tier 1iDeCO/
National
Fund

PensionCorporate pension
plans (DB/DC)

Category 1 insured
personEmployee’s Pension
National Pension (Basic Pension)
Category 2 insured
personRetirement pension
benefits

Category 3 insured
personSource: Compiled from Ministry of Health, Labor and Welfare (2023), p. 6

The Ministry of Health, Labor and Welfare(MHLW) (2023) has announced that “Tiers 1
and 2 (public pensions) provide basic support
for retirement, and Tier 3 (corporate and private
pensions) support the diverse needs of people inretirement.” Fundamentally, the concept behindthe division of roles between public and private
pensions is that public pensions provide basic
benefits with private pensions, including
corporate pensions, positioned as a supplement
to this.

National Pension is determined in accordancewith the period over which premiums are paid.
In FY2022, the full amount was ¥64,816 permonth, so the monthly benefit is the full amount
multiplied by the number of months in which
premiums were paid divided by 480 months (40years). For the Employees’ Pension, the amountof benefits is determined in accordance with theincome earned by the insured person during
their working life (average standard
remuneration) and the insured person’s periodof coverage.

As is well known, Japan’s public pension
system consists of the National Pension, which
covers everyone aged 20 and over, and the
Employees’ Pension, which covers company
employees and civil servants. The key feature isthat it is a “universal pension” with a “two-tier”
structure. The pensions are funded on a pay-asyou-go basis.

According to the Ministry of Health, Laborand Welfare (2022), the average value of
benefits under the National Pension in FY2021
was ¥56,000 per month, and the average valueof benefits under the Employees’ Pension(including the National Pension) was ¥146,000
per capita per month. The government conducts
a fiscal review of the status and outlook of
public pension finances at least every five years.
Depending on the outlook for economic growthand other factors, further cuts in benefits may
be expected.

Pension benefits are funded by social
insurance premiums. Category 1 insured
persons, which include self-employed workers
and non-full-time workers, pay a fixed
premium (¥16,590 per month in FY2022).
Category 2 insured persons, such as company
employees and civil servants, pay a fixed rate
(18.3% of monthly standard remuneration in
FY2022). Dependent spouses of Category 2
insured persons do not have to pay premiums(that is, Category 3 insured persons, such as
housewives whose spouses are company
employees or public employees). To qualify fora pension, a person must have paid the Japanesenational pension contributions for at least 10
years. Those who meet this condition receive
the National Pension, and office workers andcivil servants also receive the Employees’
Pension. The starting age for receiving benefits
is 65 years old and the value of benefits for the

2.2 Private Pensions
Fig. 2 provides an overview of private
pension plans in Japan. The tax treatment ofprivate pensions is on an “EET” basis:
contributions are tax-exempt, investment
income and gains are tax-exempt, and benefits
are taxed. For DB contributions, employer
contributions are treated as fully tax-deductible,
while employee contributions are deductible aslife insurance premiums. For corporate DC andindividual DC (iDeCo) plans, employer
contributions are fully tax-deductible, while
employee (individual) contributions are
deductible as small-scale enterprise mutual aid
premiums.
3

Fig. 2: Overview of private pensions in Japan (2023)
Tax treatment
Contribution method
Starting age for receiving
benefits

Tax treatment of contributions

Tax treatment of investment
income/gains
Tax treatment of payment ofbenefits

DB
EET
Employer, employee
At the time of reaching age 6070 as stipulated in theregulations or at the time ofretirement at age 50 or older (ifstipulated in the regulations)

Corporate DC
Individual DC (iDeCo)
EET
EET
Employer, employee
Individual (in principle)
At the time of claiming benefits from age 60-75

Employer contributions are
Employer contributions are deductible
deductible
Employee (individual) contributions are deductible as small-scale
Employee contributions areenterprise mutual aid premiums
deductible as life insurance
premiums
Special corporate tax (suspended until March 2026)
Miscellaneous income (eligible for public pension deduction)
Lump sum payment (eligible for retirement income deduction)

Source: Ministry of Health, Labor and Welfare (2023), Japan Securities Research Institute (2022) and other sources

Fig. 3: Revision of DC contribution limits for Category 2 insured persons(1) Enrolled in corporate
DC plan only
From 01/01/2017
From 12/01/2024(2) Enrolled in a
corporate DC and a DB
plan
Corporate DC
Corporate DC¥55,000 per month of ¥27,500 per monthwhich, iDeCo is ¥20,000 of which iDeCo is¥12,000¥55,000 per month – DB equivalent contribution(3) Enrolled in DB plan
only
iDeCo
¥12,000 per month(4) Not enrolled ineither a corporate DC or
DB planiDeCo¥23,000 per monthSame as on left

¥23,000 per month

Of which iDeCo is ¥55,000 - (employer’s corporate
DC contribution + DB equivalent contribution)(Maximum ¥20,000)

Note: iDeCo contribution limit for Category 1 insured persons is ¥68,000 per month when combined with the National Pension
Fund. iDeCo contribution limit for Category 3 insured persons is ¥23,000 per month.
Source: Ministry of Health, Labor and Welfare (2023), p. 93.

Corporate DC plans allow employees to makematching contributions. Individual DC plansare, in principle, eligible for matching
contributions, but there is also a contribution
system for small- and medium-sized companies(iDeCo Plus).

Next, Fig. 3 shows the contribution limits forprivate pension plans, which have been revised
several times since the establishment of the DC
contribution system. If we look at thecontribution limits after January 2017, it can beseen that the contribution limits vary dependingon the type of corporate pension plan in whicha Category 2 insured person is enrolled. This
makes the system quite complicated.

In terms of the tax treatment of investment
income or gains, the accumulated reserve fundis subject to a special corporate tax, which iscurrently suspended until March 31, 2026.
Pension benefit payments are subject to income
tax as miscellaneous income in the case ofregular pensions and as retirement income inthe case of lump-sum payments, with the public
pension credit and retirement income tax credit
applying respectively.

4

In terms of specific amounts for Category 2
insured persons, for those in “(1) Enrolled in a
corporate DC plan only,” it is ¥55,000 per
month, which is ¥660,000 per year. For those in“(2) Enrolled in a corporate DC and a DB plan,”the monthly DB equivalent contribution isassessed to be ¥27,500, so the corporate DC
plan limit overall is ¥660,000 per year, the sameas in (1). However, the iDeCo contribution
limits vary for (1) and (2). For “(3) Enrolled in
DB plan only” and “(4) Not enrolled in either a
corporate DC or DB plan”, the iDeCo monthly
contribution limits are ¥12,000 and ¥23,000,
respectively.

Investments are made either by a parent or
guardian, or with their consent, andwithdrawals are restricted until age 18.
The Tsumitate NISA (installment-type) wasestablished to support long-term investment forsmall amounts on a cumulative diversified basis.
The tax-exemption applies to dividends andcapital gains from investments in specified
mutual funds. The annual investment limit is¥400,000, and the maximum tax-exempt period
is 20 years, so the maximum tax-exempt
investment limit is ¥8 million. Account holders
must choose between holding a Tsumitate NISA
or a General NISA: they cannot hold both.

On the other hand, from December 2024
onwards, the annual DC contribution limit willbe ¥660,000 for both (1), (2) and (3). In addition,
the iDeCo contribution limit will be ¥20,000.
Furthermore, the monthly DB-equivalent
contribution will no longer be deemed to be¥27,500 but will reflect the actual payments
made. However, the iDeCo contribution limit
for (4) will remain at ¥23,000 per month, andthe contribution limit for private pensions is nota uniform amount.

In accordance with tax reforms in 2020, theinvestment term of the General NISA and theTsumitate NISA was increased by five years
with the General NISA relaunched as a two-tierproduct. It was decided to phase out the Junior
NISA by the end of 2023. However, in the
FY2023 tax reform, the NISA is being
drastically revised under the Kishidaadministration’s Doubling Asset-based Income
Plan as part of an effort to shift household assets
from savings to investments. The revised NISA
is shown in Fig. 4. The main feature is thepermanence of the system. In addition, a
Tsumitate framework and a Long-Term
Investment Framework will be established,with annual investment limits of ¥1.2 millionand ¥2.4 million, respectively. Both products
can be held simultaneously. Furthermore, thetax-exempt investment limit is ¥18 million (ofwhich up to ¥12 million can be applied to theLong-Term Investment framework). These
investment limits apply on a lifetime basis.

2.3 NISAs
The NISA (Nippon Individual Savings
Account) tax-exemption program for small
investments was launched in Japan in January
2014. The Junior NISA was introduced in
January 2016, followed by the Tsumitate NISA
in January 2018. The original NISA is referred
to as a General NISA. The tax-exemption under
the General NISA covers income from
dividends and capital gains for stocks, mutual
funds and similar instruments. The annual taxexempt investment limit is ¥1.2 million, with amaximum tax-exempt period of 5 years.
Therefore,themaximum
tax-exempt
investment limit is ¥6 million.

2.4 Characteristics of Japanese Public andPrivate Pensions
The previous paragraphs provide an overview
of the pension structure in Japan. The key
features of the Japanese pension system can besummarized as follows.

The Junior NISA is for minors (under age 20)
and offers tax-exempt income from dividends
and capital gains for stocks, mutual funds andsimilar instruments, similar to the general NISA.
The annual investment limit is ¥800,000 over a
maximum period of five years, so the maximum
tax-exempt investment limit is ¥4 million.

•

5

The public pension provides basic support
for retirement, with private pensions
positioned as a supplement to public
pensions.

Fig. 4: NISA structure from 2024
Tsumitate framework
Combined use of both systems
Annual limit
Total tax-exempt investment limit
Tax-exempt holding period
Account opening timeframe
Source: Compiled from FSA data

•

•

•

•

Long-Term Investment framework
Permitted¥1.2 million¥2.4 million¥18 million (of which up to ¥12 million can be applied to the Long-Term
Investment framework)
Indefinite
Indefinite
Permanent
Permanent

Public pension benefits in the U.S. are paid
under the Old Age, Survivors, and Disability
Insurance (OASDI) program, which is often
referred to as “social security.” All employees
and self-employed persons with annual income
over a certain limit qualify for this program.
Funding is on a pay-as-you-go basis, and whererevenues from social security taxes exceed
outgoings, the surplus is accumulated in the
OASDI Trust Fund.

However, depending on theoutlook for economic growth andother factors, the amount of public
pension benefits is expected to
decline. In addition, the national
pension system, in which selfemployed people are enrolled, has
fixed premiums and benefits, witha limited income redistribution
effect.
Public and private pensions aretaxed on an EET basis, but certain
deductions apply depending on thetype of benefit.
The annual contribution limit for
private pensions is generally
considered to be approximately¥660,000. However, this varies
depending on the pension schemes
to which one is enrolled, making
the system more complicated.
The 2023 tax reform makes the
NISA system permanent andsignificantly expands it.

Social security taxes, which fund pensions,are collected by the Internal Revenue Service(IRS) and benefits are paid by the Social
Security Administration. The social security tax
rate is 12.4% and is capped at $160,200 per
annum for 2023 (for employees, this is split 5050 between employer and employee)1.
To be eligible for the pension, a worker musthave accumulated 40 quarters (10 years) of
employment. In principle, the starting age forreceiving pension benefits was originally 65,
but is being raised to 67 in stages from 2003 to
2027. The amount of pension benefits isdetermined according to average indexedmonthly earnings (AIME).2

3. The U.S. Pension System
3.1 Public Pensions
The three major sources of retirement incomein the U.S. – (often called the “three-legged
chair”) – are public pensions (social security),
corporate pensions, and independent retirement
accounts (IRAs).

Specifically, as shown in Fig. 5, the benefit
amount is broken down as follows: 90% of thefirst $1,115 of the AIME; plus 32% of any
amount over $1,115 up to $6,721; plus 15% of
any amount over $6,721.

1. In addition, there is a 2.9% Medicare tax (for employees, this is split between employer and employee).
2. The total is obtained by taking the 35 highest earning years of indexed annual earnings and dividing by 420 (35 years x 12
months).

6

Fig. 5: Structure of U.S. public pension benefits
Benefits
15%

32%

90%
$1,115

Average indexed monthly earnings$6,721

Source: Compiled by authors

The benefit structure is designed to give
preferential treatment to those on lower
incomes, to ensure that the social security
system redistributes income after retirement.
According to Social Security Administration(2022), the number of workers (employees andself-employed) enrolled in the OASDI programin 2021 was 179.3 million, the total number ofbeneficiaries was 65.2 million, and the total
amount of benefits paid was $1,133.2 billion.
The average monthly retirement pension
benefit in December 2021 was $1,658.
According to another Social Security
Administration document3, as of June 30, 2022,
nearly nine out of 10 individuals over the age of
65 receive benefits, and those benefits represent
about 30% of total income to older Americans.

shows an overview of corporate pensions. Both
DB and DC plans work on an “EET” basis:
contributions are tax-exempt, investment
income and gains are tax-exempt, and benefits
are taxed.
401(k) participation is voluntary, with
contributions
consistingof
employeecontributions and employer contributions. The
401(k) employee contribution limit is $22,500
per year in 2023, or $66,000 per year whencombined with employer contributions.
Participants aged 50 and over can make a catchup contribution of $7,500 annually, so for theseolder participants, the annual limit, including
employer contributions, is $73,500. The valueof benefits is determined by the participant’s
own investment choices. The starting age forreceiving benefits is 59½ years old, and there isa minimum withdrawal obligation (Required
Minimum
Distribution(RMD))
thatparticipants must start making withdrawals byApril 1 of the calendar year after turning 72.4 In
principle, withdrawals before the age of 59½
are not permitted,

3.2 Corporate Pensions
Corporate pension plans in the U.S. are
divided into DB and DC schemes. DC plans are
typically 401(k) plans. A 401(k) plan is apersonal pension savings account that was
launched in 1978, as defined in subsection
401(k) of the Internal Revenue Code. Fig. 63 (https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf)
4 The SECURE 2.0 Act of 2022 sets the age of Required Minimum Distribution at 73 from 2023 and at 75 from 2033.

7

Fig. 6: Overview of corporate pensions in the U.S. (2023)
Tax treatment
Contribution method
Starting age for receiving benefits
Treatment at time of contribution

Carry over unused allowances
Treatment at the time of payment of benefit

DB
EET
Employer, in principle
Generally, at 65- Contribution by employer in principle(tax deductible)- Generally, employees do not contribute(no deduction for contributions)- Benefit payment may not exceed thelower of $265,000 per year or the averageof the highest three consecutive years ofcompensation.

Corporate DC (401(k))
EET
Employer and employee
59½- Employee contribution limit is the lowerof $22,500 per year or total annualcompensation.
- Employer contribution limit is $66,000 per
year when combined with employee
contributions.
- The maximum deduction for employer
contributions is 25% of total annualcompensation.
- Participants aged 50 and over can makecatch-up contributions of $7,500 annually.

Not permitted
Required Minimum Distribution applies
from age 72 or retirement, whichever islater

Note: The SECURE 2.0 Act of 2022 sets the age of Required Minimum Distribution for 401(k) plans at 73 from 2023 and at
75 from 2033.
Source: Compiled from the Joint Committee on Taxation (2021), IRS website

and a penalty tax of 10% is imposed except incertain cases, such as death or disability of theaccount owner. Some plans also allow
participants to take loans from their 401(k).

As shown in Fig. 7, the combined contribution
limit for IRAs in 2023 is $6,500 per year for
traditional IRAs and Roth IRAs, with anadditional $1,000 per year in catch-up
contributions allowed for participants aged 50
and older. Contribution limits are lower
compared to 401(k) plans. However, as statedpreviously, IRAs are often used to transfer
assets from company pension plans whenchanging jobs or retiring. According to theInvestment Company Institute (2022), IRA
assets at the end of 2021 were estimated to be$13,913 billion, much higher than the $7,725
billion invested in 401(k) plans. According to
the same data, total retirement assets (excluding
public pensions) are $39,277 billion, so IRAs
and 401(k)s account for 35% and 20%,
respectively, of total retirement assets(excluding public pensions). For traditional
IRAs, the contribution amount that isdeductible from income is reduced if the plan
participant is also enrolled in a company
pension plan. For example, if a single person in
a company pension plan has an income (MAGI:
Modified Adjusted Gross Income) of less than$73,000, they can make a full deduction up to
the contribution limit; if their income isbetween $73,000 and $83,000, they can make apartial deduction; if their income is $83,000 or
more, no deduction is permitted.

3.3 IRAs (Individual Retirement Account)
An IRA is a savings account created under the
Employee Retirement Income Security Act of1974 (ERISA) for workers who are unable toparticipate in a qualified retirement pension
scheme provided by their employer. Currently,
there are several types of IRAs. The original
account that was launched is called the
traditional IRA. The other main type is the RothIRA which was created by the Taxpayer Relief
Act of 1997 to help boost workers’ savings.
IRAs work on an “EET” basis: contributions
are tax-exempt, investment income and gains
are tax-exempt, and benefits are taxed. RothIRAs, however, are on the “TEE” basis:
contributions are taxed, while investments andbenefits are tax-exempt. In addition, one of theimportant aspects of IRAs is that assets such as
corporate pensions can be transferred into them(rollover).

8

Fig. 7: Overview of Individual Retirement Accounts in the U.S. (2023)
Tax treatment
Contribution method
Starting age for receiving benefits
Tax treatment at time of contribution

Carry over unused allowances
Treatment at the time of payment of benefit

Traditional IRA
Roth IRA
EET
TEE
Individual contributions
Individual contributions
59½
Must be at least 59½
Total contribution limit is $6,500 per year or taxable salary for the year, whichever is
lowerParticipants over age 50 can make a catch-up contribution of $1,000 per year.
For IRAs, the maximum amount of tax deduction is reduced or eliminated depending on
the level of income if the participant is also a member of a company pension plan.
For Roth IRAs, the contribution limit is reduced or eliminated based on income.
Not permitted
Taxed in fullTax-exempt (if more than 5 years haveRequired Minimum Distribution applies
passed since the account was opened)from age 72 or retirement, whichever islater.

Note: The SECURE 2.0 Act of 2022 sets the age of Required Minimum Distribution for 401(k) plans at 73 from 2023 and at
75 from 2033.
Source: Compiled from the Joint Committee on Taxation (2021), IRS website

Contribution limits for the Roth IRA also
decrease according to income. A single personwith MAGI of less than $138,000 cancontribute up to the maximum amount. The
contribution limit is reduced if MAGI is morethan $138,000, but less than $153,000. No
contributions can be made if MAGI is over
$153,000. The age from which withdrawals canbe made is 59½. For traditional IRAs there is an
RMD condition that withdrawals must begin nolater than April 1 after reaching the age of 725.
There is a penalty tax of 10% for early
withdrawals, except for certain cases such as
death, disability, high medical expenses, firsthome purchase, and higher education expenses(for Roth IRAs this applies to the earnings
portion of investments only).

3.4 Characteristics of Public and Private
Pensions in the U.S.
The previous paragraphs provide an overview
of the U.S. pension system. The characteristicsof the system can be summarized as follows.
•••

According to Joint Committee on Taxation
data6, in 2019, there were 28,615 individuals
with traditional IRA and Roth IRA balances
exceeding $5 million, and 24,251 individuals
with traditional IRA balances exceeding $5
million. These large IRAs are called megaIRAs. For traditional IRAs, tax equity is
maintained by the RMD and taxation at the timeof withdrawal.

•

Public pensions, corporate pensions,and IRAs form a “three-legged chair”
and play an important role in asset
building for retirement.
Public pensions are financed by a social
insurance tax determined according toincome level, and benefits are moregenerous for those with lower lifetime
average earnings. This has the effect ofredistributing income in old age.
Corporate
pension(401(k))contribution limits are high ($22,500
per year for employees, $66,000 per
year in combination with employer
contributions).
The Roth IRA is the equivalent ofJapan’s NISA, but with lower
contribution
limitsandsomerestrictions on earnings. Therefore, theasset formation support system isfocused primarily on asset building for
retirement.

5 The SECURE 2.0 Act of 2022 sets the age of Required Minimum Distribution for 401(k) plans at 73 from 2023 and at 75
from 2033.
6 (https://www.finance.senate.gov/imo/media/doc/7.28.21%20JCT%20Mega%20IRA%20Data1.pdf)

94. The UK Pension System
4.1 Public Pensions
The UK’s asset building support system
consists of public pensions, private pensions,and ISAs. Regarding public pensions, a new
system was introduced in April 2016 to replace
the previous system. The old system consistedof a fixed Basic State Pension and an earningsrelated Additional State Pension. Opt-out fromthe Additional State Pension is allowed formembers of private pension schemes subject tocertain requirements. The new system, on theother hand, is called the New State Pension andis a fixed amount. Both the old system and the
new system are pay-as-you-go schemes.

to 68 in future. The full amount of the new State
Pension is £185.15 per week.8

The pension is funded by National Insurance
contributions, with the National Insurance
contribution rates for FY2022/23 shown in Fig.
8. National Insurance also covers other benefits
such as maternity, unemployment and industrial
accident payments as well as contributions for
public pensions.7 Ten years of membership isrequired in order to be eligible for benefits. The
starting age for benefits is 66, but will be raised

4.2 Private Pensions
Since the new public pension system is a
fixed benefit scheme with no compensationrelated variable element, the importance ofprivate pensions is increasing. An overview ofprivate pensions in the UK is shown in Fig. 9.
These consist of occupational pensions (DB and
DC corporate pensions), along with private
pensions.

The new system is characterized by the factthat the contribution rate is based on the
remuneration of the employee and the incomeof the self-employed, whereas the benefits are
fixed. With the launch of the new system, theredistribution function of the public pension
system is effectively strengthened since thestructure of national insurance contributions
remains unchanged. The UK public pension is
not a universal pension; for those without apension, a benefit is available in the form of thePension Credit (funded by tax).

Fig. 8: National Insurance contribution rates in the UK (2022/23)
Class
1

2
3
4

Applies to
Employees earning more than £123 per week

Self-employed with annual profits between£6,725 and £11,909
Low-income earners who are exempt fromClass 1 and Class 2 payments, unemployed
and students (voluntary)
Self-employed with an annual profit of£11,909 or more

Contribution rate
Employees: 0% on income between £123 and £242
per week; 12% on income between £242 and £967 per
week; 2% on income over £967.
Employers: 13.8% on income from £175 per week
£3.15 per week
£15.85 per week
In addition to Class 2 contributions, 9.73% on annual
profit between £11,909 and £50,270 and 2.73% on
annual profit above £50,270.

Source: HMRC website
7 The National Health Service (NHS) is separate to National Insurance. Part of the National Insurance contributions contributetowards the costs of the NHS.
8 The basic state pension under the old system was £141.85 per week.

10

Fig. 9: Overview of private pensions in the UK (2022/23)
Tax treatment
ParticipantsContribution method
Starting age for receiving
benefits
Tax on contributions

Carry over unused allowances
Tax on benefits

Corporate DB pension
Corporate DC pension
EET
EET
Employees
Automatic enrollment for those with annual salaries of £10,000 or
more.
Employer
Employer, employee
Between 55 and 75

Private pension
EET
Every individual
Individuals- Upper limit of income deduction for employees is based on combining all contributions from
employers and employees (individuals)- Annual contribution limit: gross annual income or £40,000 per year, whichever is lower- Lifetime cumulative allowance: £1,073,100
3-year carryover is permitted
Up to 25% of pension assets can be withdrawn as a tax-exempt lump sum

Source: Compiled from Pensions Policy Institute (2022), UK government website

The tax treatment is on the EET basis:
contributions are tax-exempt, income and gains
from investments are tax-exempt, and benefits
are taxed. While overall benefits are taxed, up
to 25% of pension assets can be withdrawn as a
tax-free lump sum. However, early withdrawals
are not permitted in principle and a penalty tax
of 55% of the amount withdrawn is levied in theevent of an early withdrawal.

For DC pensions, the lifetime limit is the total
pension fund accumulated, and for DB pensions,the lifetime limit is calculated as 20 times theannual pension amount. If a pension exceeds
the lifetime allowance limit, there is anadditional tax of 25% if the benefits arereceived as an annuity or 55% if they are paid
as a lump sum.
In October 2012, an automatic enrollment
system was introduced for corporate pensions.
This obliges employers to automatically enroll
employees with an annual salary of at least£10,000 (£8,105 at the time of introduction)
into a workplace pension provided by theemployer. Alternatively, the employee may
choose to opt out of this pension. In addition,
since not all employers operate a workplace
pension scheme, a new DC pension called
NEST (National Employment Savings Trust)has been set up by the UK government
alongside the introduction of automatic
enrollment.

Pension contributions are subject to an annual
allowance of £40,000. The approach is that
employerandemployee(individual)
contributions are pooled with a common limit
applied to the combined DB and DC schemes.
The calculation method for the annual DB
contribution equivalent amount is explained in
the Appendix. As shown in Fig. 10, for higher
earners (individuals with adjusted incomes
above £240,000 in 2022/23), the annual
allowance is tapered and drops by £1 for every£2 increase in adjusted income, down to aminimum of £4,000. Therefore, for individuals
with adjusted incomes in excess of £312,000,
the annual allowance is £4,000.

The UK government announced its new
budget for the year on March 15, 2023. The
Chancellor of the Exchequer, Mr. Hunt,proposed a significant boost for private
pensions, including an increase in the annual
contribution allowance for private pensions
from £40,000 to £60,000, the abolition of the
lifetime allowance and the modification oftapering of annual contribution limits for highearners, on the basis that “No one should be
pushed out of the workforce for tax reasons.”

There is also a lifetime aggregate limit oncontributions. This is a limit on the total amountthat can be built up in pension benefits (i.e.,
pension that has been contributed and invested)
and is set at £1.0731 million for 2022/23.

11

Fig. 10: Annual contribution limit for high-income earners

Source: Institute for Fiscal Studies 2021
With regard to tapering of the allowance forhigher earners, there is no change to themechanism whereby the annual allowance
drops by £1 for every £2 increase in adjusted
income over a certain threshold. However, theactual threshold is increased from adjusted
income of over £240,000 to adjusted income ofover £260,000 and the minimum allowance isalso increased from £4,000 to £10,000.
Therefore, the minimum amount now applies toadjusted income over £360,000, up from
£312,000 previously.

the Personal Equity Plan (PEP), which covered
listed shares and investment trusts, and the Taxexempt Special Savings Account (TESSA),
which covered deposits in banks, building
societies and other financial institutions. ISAs
were launched to address these institutional
imbalances and to promote asset building byconsolidating and merging the two systems.
They were originally intended as a temporary
initiative but are now available on a permanent
basis. Currently, there are several types of ISAs,
including Cash ISAs, Stocks and Shares ISAs,
Innovative Finance ISAs and Lifetime ISAs.9
The tax treatment for ISAs is TEE, namely
contributions are paid from taxed income, while
investment growth and withdrawals are taxexempt.

The government has indicated that this is toremove the reason why high-income earners,
such as NHS doctors, might retire early due to
tax on their pensions. It should be noted that
increasing attention is being paid in the UK to
the relationship between taxation and asset
building for retirement and different workstyles(HM Treasury, 2023).

Fig. 11 provides an overview of the first threeof these. In terms of the tax-free investment
allowance, the total for 2022/23 is £20,000,
including Lifetime ISAs. Fig. 12 provides an
overview of Lifetime ISAs.

4.3 ISAs
Previously in the UK, there were two
schemes to support asset building:

9 Junior ISAs are also available. These were introduced as an alternative to the Child Trust Fund.

12

Account holders
Tax-exempt period
Contribution limit
Investment in

Fig. 11: Overview of ISAs in the UK (2022/23)
Cash ISA
Stocks and Shares ISA
Innovative Finance ISA
16 years and over
18 years and over
18 years and overIndefinite£20,000 per year across Cash ISA, Stocks and shares ISA, Innovative
Finance ISA and Lifetime ISA (incl. £4,000 limit on for Lifetime ISA)
Cash
Equities,
bonds, Peer-to-peer loans, etc.
investment trusts, etc.

Source: HMRC website

Account holder
Investment period
Tax-exempt period
Contribution limit
Investment in
Tax on withdrawals

Fig. 12: Overview of Lifetime ISA (2022/23)
Aged between 18-40 years old
Up to 50 years
Up to 60 years£4,000 per year (with a 25% bonus on contribution (up to a maximum of£1,000 per year) from the government)
Cash, equities, bonds, investment trusts, etc.
Withdrawals are tax-free for purchase of first home or after accountholder’s 60th birthday. Withdrawals for any other reason, a fee of 25% of
the amount withdrawn is payable.

Source: HMRC website
Lifetime ISAs have some similarities topensions in so far as withdrawals are tax-free
after the account holder’s 60th birthday or when
they purchase their first home.

•

4.4 Characteristics of Public and Private
Pensions in the UK•

The previous paragraphs provide an overview
of the UK system. The characteristics of thesystem can be summarized as follows.
•
•

•

•

•

Both public and private pensions areused for asset building for retirement.
Public pensions are redistributive since
they are subject to a fixed rate ofcontributionfor
employeeremuneration and self-employment
income, with fixed benefits paid.
Private pensions are taxed on an EET
basis, but with certain deductions at thetime of benefits.
Private pensions have a highcontribution limit (with an annual
contribution limit of £40,000 and a
lifetime aggregate allowance of£1,073,100). The government has
proposed an increase in the annual
contribution limit to £60,000 and theabolition of the lifetime aggregate limit
in the 2023 budget.
ISAs provide an additional support for
asset building in addition to public
pensions and private pensions.
The availability of Cash ISAs meansthat ISAs can be used for savings as awhole, not just risk assets.
The contribution limit for private
pensions (£40,000) is set at twice thelevel of the ISA’s tax-free allowance(£20,000). The contribution limit in the
recent2023
budgetproposals(£60,000) is three times higher.

5. Implications for the Corporate Pension
Plan (iDeCo) in Japan and the NISAThis paper has reviewed the systems forsupporting asset building in Japan, the U.S. andthe UK.

13

JapanPensionConditions
for receipt ofbenefits
Starting age
for receiving
benefits
Benefits
RedistributivefunctionFig. 13: Comparison of national pensions (public)
U.S.
UK

Social insurance premiums
Category 1 insured person: Fixed amount
Category 2 insured person: Fixed rate
(Employer/employee split)
Category 3 insured person: No contribution
10 years of contributions

Social security payroll tax
Employees: Wages and salaries
Self-employed: Business income

National insurance premiums
See Fig. 8.

40 quarters of contributions(equivalent to 10 years)

10 years of contributions

65

65 (rising to 67 in future)

66 (rising to 68 in future)

National pension: ¥56,000 per month
Employees’ pension: ¥146,000 per month(including National Pension)
Low¥216,000 per month($1,658 per month)¥118,000 per month(£185.15 per week)

High

High

(Notes)1) For Japan, average benefit in 2021; for U.S., average benefit amount in December 2021; for UK, full amount of the newstate pension in 2022/23.
2) Exchange rate $1= ¥130 and £1= ¥160.
Source: Compiled by author from various sources.

Fig. 13 summarizes the key points from thecomparison of the public pension systems inthese countries. To start with the value of
benefits, in Japan, the monthly benefit for the
National Pension is ¥56,000 (average), and thefull amount in 2022 was ¥65,000. In the UK, thestate pension is a fixed benefit, and the fullamount of the new state pension is equivalent to¥118,000 per month. In addition, the Employees’
Pension in Japan is ¥146,000 per month(average), while in the U.S. the social security
benefit is equivalent to ¥216,000 per month(average). Although the pricing environment ineach country needs to be taken into account, it
is clear that public pension benefits in Japan arecomparatively low.

In the case of Japan, the Employees’ Pension
consists of a fixed benefit and a remunerationbased portion, which is redistributive to acertain extent. However, although there is an
exemption for contributions for low-income
earners, the basic concept of the national
pension is fixed contributions and fixed benefits.
Therefore, the redistribution effect of thenational pension in Japan appears to beparticularly low on a comparative basis.
Fig. 14 compares the tax-free contribution
limits of private pensions, along with otherasset building support schemes. In the U.S., thecontribution limit for 401(k) plans is set at ahigh level of ¥8.58 million, whereas the RothIRA, by contrast, has a much lower limit at¥845,000. IRAs are useful as a vehicle for therollover of 401(k) contributions, although thecontribution limit itself is small. In the UK, theprivate pension contribution limit is ¥6.4
million (proposed increase to ¥9.6 million in the2023 budget) and the ISA allowance is ¥3.2
million. Thus, the contribution limit for private
pensions is set at a high level, while for ISAs it
is half of this level (one-third of the level on thebasis of the 2023 budget). Moreover, the ISAs
cover all savings, not just stocks. This shows

In terms of the redistributive effects, in the
U.S., benefits are more generous to low-income
earners, which indicates that social security
benefits do have an income redistribution effect.
Biggs (2020) points out that the U.S. social
security system is highly redistributive in termsof the income replacement rate and proposes aflat rate benefit as a reform for public pensions.
In this way, there is a debate in the United Statesthat the redistribution function should be further
enhanced. In the UK, the introduction of a newnational pension has increased income
redistribution.

14

Fig. 14: Comparison of annual contribution limits for private pensions, tax-free savings accounts, etc.
Private pension (EET)

Tax-free savings accounts, etc.
(TEE)

Japan
¥660,000

U.S.
¥8,580,000($66,000)¥3,600,000¥845,000($6,500)

UK
Pre- April 2023 ¥6,400,000(£40,000)
2023 budget proposal ¥9,600,000(£60,000)¥3,200,000(£20,000)

Notes1) Japan: Contribution limit shown for tax-free savings accounts is for NISAs from 2024 onwards.
2) U.S.: Contribution limit shown for private pensions is for 401(k); for tax-exempt savings, Roth IRAs.
3) UK: Private pensions in the UK have a lifetime allowance of ¥171.7 million (£1.0731 million); the 2023 budget proposes
an abolition of the lifetime allowance.
4) Exchange rate $1= ¥130 and £1= ¥160.
Source: Compiled by author from various sources.

that the focus for asset building for retirement
in both the U.S. and UK is on private pensions.

With regard to private pensions, Fig. 14
shows that the tax-free contribution limit for
private pensions in Japan is low while the taxfree investment allowance for NISAs is high.

Japan, on the other hand, is the opposite of
the U.S. and the UK, with a low contribution
limit for private pensions (¥660,000) and a highlimit for NISAs (¥3.6 million). In terms ofprivate pensions and tax-free savings accounts,
the combined contribution limits for Japan andthe UK are ¥4.26 million and ¥9.6 million
respectively (¥12.8 million in the 2023 budget
proposal). In the U.S., 401(k) and Roth IRA
limits cannot be aggregated, but the limit for
401(k) plans alone is ¥8.58 million.

The first pillar of the Doubling Asset-based
Income Plan is to radically expand NISAs andmake them permanent, while the second pillar
is the reform of the iDeCo system. The 2023 tax
reform has resolved to expand the NISA systemand to make it a permanent scheme. However,
it is a priority for Japan’s tax system that there
is a review of the contribution limits for private
pensions, including iDeCo, in order tostrengthen the framework for asset building for
retirement. It is important not simply to expand
the contribution limits, but also to develop atemplate for income security in old age,
including a target income replacement ratio as
the basis for this review.10

This paper has examined the taxation of
public and private pensions and savings inJapan, the U.S. and the UK with a focus on asset
building for retirement. In terms of public
pensions, as Fig. 13 shows, the level of benefits
in Japan is low, as is the redistributive effect. As
the birthrate declines and the population ages, it
is becoming increasingly to sustain public
pensions as the basis of income in retirement,
and a fundamental rethink of the role of public
and private pensions is long overdue.

Appendix: Method of calculating annual DB
contributions in the UK
The combined annual contribution limit for
private pensions in the UK (DB and DC) is£40,000. For DC pensions, the annual
contribution is the sum of the contribution of
the individual and of the employer. For DB
pensions, it is necessary to calculate the pension
input amount or annual contribution equivalent.

10 The design of private pensions in Japan is discussed in Tajika and Yamada (2023).

15

The calculation method is explained based on
Llanwarne (2010) and an HMRC document,“Pension Tax Manual 053320”11. The deemedincrease in DB benefits over a year is referred
to as the DIP (Deemed Increase in Pension) andis defined as follows:
DIP = A1 - {A0 x (1 + r)}
where A1 is the annual DB benefit at the end of
the year, A0 is the annual DB benefit at the endof the year, and r is a coefficient based on the
inflation rate.
If inflation is zero and annual income is£80,000, with 32 years of pension membershipto retirement and an annual benefit multiplier of
1/60th, then

Building in Japan: The Role of Private
Pensions and the Tax System CHUOKEIZAISHA HOLDINGS, INC., forthcoming
publication
Japan Securities Research Institute (2022)
Securities Markets in Japan 2022 (Illustrated)
Biggs, A. G. （2020） “Changes to Household
Retirement Savings Since 1989” AEI Economic
Perspectives May 8, 2020
HM Treasury （2023） Spring Budget 2023
speech（https://www.gov.uk/government/speeches/
spring-budget-2023-speech）
Institute for Fiscal Studies （2021） Taxationof Private Pensions Explained
Investment Company Institute （2022） The
US Retirement Market, First Quarter 2022
Joint Committee on Taxation （2021） Present
Law and Background Relating to Retirement
Plans
Llanwarne, T. （2010） Reducing the Annual
Allowance Setting the Valuation Factor,
Government Actuary’s Department
Pensions
PolicyInstitute（2022）The
Pensions Primer: A Guide to the UK Pensions
System Updated as of June 2022
SocialSecurity Administration（2022）
Annual Statistical Supplement, 2022

A1 = ￡80,000 x (32 x 1/60) = ￡42,666
A0 = ￡80,000 x (31 x 1/60) = ￡41,333
From this, DIP = A1 - A0 = ￡1,333, whichis the pension benefit obtained from a year’scontribution to a DB pension.
This amount multiplied by a set valuation
factor (Valuation Factor) is called the Pension
Input Amount (PIA) and is deemed to be theamount equivalent to an annual contribution toa DB pension.
For example, if the valuation coefficient is 16,
then PIA = DIP x 16 = (£42,666 - £41,333) x 16
= £21,333.

Eiji Tajika (Professor Emeritus, Hitotsubashi
University)
Tadao Yamada (Senior Researcher, JSRI)

References
Ministry of Health, Labor and Welfare (2022)
Overview of Employees’ Pension Insurance andthe National Pension, December 2022
Ministry of Health, Labor and Welfare (2023)
Pension System Basic Data Collection, January
2023.
Eiji Tajika and Tadao Yamada (2021) Asset
Building in the United States: Debate overPublic/Private Pensions and Individual
Retirement Accounts, Securities Review, Vol.
61, No. 4, pp. 96-111
Eiji Tajika and Tadao Yamada (2023), The Roleand Design of Private Pensions in Japan:
Optimizing Income in Retirement, Securities
Taxation Study Group ed., Household Asset
11 （https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm053320#IDAT 4 PMB）

16