Pensions in the United Kingdom - Essay Example

Pensions in the United Kingdom Institution Pensions in the United Kingdom Pensions in UK Introduction Pensions are ways that ensure that citizens get a regular amount of income upon retirement. Pensions are not for elderly but a tax-free way to save for retirement. There are three types of pensions namely that the state pension, private pension and personal pension. State pension is regular payments made by the state to eligible pensioners who reached the states pension age. To qualify for a basic state pension, an individual must have paid the National Insurance Contributions (NIC) or be credited with such contributions. Citizens who are working make the payments to the NIC; however, one can be credited with the NIC if they are getting some formal benefits such as unemployment, sickness and parental benefits (BLAKE, 2003, p.68). Current State of the Pensions Industries and pension crisis in United Kingdom The current pension scheme is designed to have a flat-rate first-tier pension plan provided by the state. This pension scheme is referred to as Basic State Pension (BSP).Secondly we have the second tier or supplementary pension schemes which is provided by the state, private financial institutions, banks, insurance firms and employers. The BSP offers a pension scheme that is low compared to averages earnings, but the plan is fully indexed to prices upon retirement of the individual. The second tier pension plan offers relatively high pension that is partially indexed to prices up to a maximum of 5% per year after retirement. One of the disadvantages of the occupational pension schemes is that it is subject to change after change in employer. Lastly, we have the personal pension plans that offer partially indexed pensions but based on unpredictable investment returns and high administrative cost involved (BUCKLE and THOMPSON, 2004, p.126) To get the basic pension one is required to have 30 qualifying years (NIC payments) and at least eleven qualifying years to generate 25% of the max amount. The pension received is taxed by the government but the payments are gross meaning that one is taxed when they start getting their pension. It is apparent that a student who plans to start a pension for future use should know that there different types of pension one can pay and save the money. These types include state pension where an individual receives the money after retirement in regards to the number of years one has contributed or paid to National Insurance Contributions (NICs) (BUCKLE and THOMPSON, 2004, p.130). The individual should know that the eligible number of qualifying years one has to attain is eleven years, which generates twenty- five percent of the saving. For one to receive the state pension in full amount, the individual has to build up the pension for thirty years of qualification. An individual can pay the state pension by paying to national insurance contribution or get credit from the government. One can build up pension years by receiving benefits, self-employed, pay full-time or get child benefits. However, if the state pension is less that tax allowances an individual is exempted from tax payments. Moreover if the taxable income including the state pension is greater than the tax allowances such a person is required to pay tax on their state pensions. The minimum contributions to NIC are £110 weekly (GREAT BRITAIN, 2013, p.76). Secondly, private pensions mainly involve Occupational pensions. This benefit of this pension scheme is that the employer will give the employees’ pension upon retirement. The employer sets aside the certain percentage of the daily wage towards saving for the retirement plan. Occupational pension a number of advantages such as tax relief, employer contributions and making life easier upon retirement. Lastly, we have personal pensions. The pension scheme is bought from banks, insurance firms and building societies, where an individual makes regular or lump sum payments to the chosen provider. Upon retirement the amount paid depends on the average contributions of the person and amount made from the investment (GREAT BRITAIN, 2013, p.73). The pensions industry In UK is in crisis as a result of many factors including lack of public confidence in the pension’s schemes being offered. Secondly, there is a notable lack of direction from the relevant government institutions on main issues affecting the industry .Thirdly; there is a lack of detailed information from key players leading to confusions between state pensions and workplace pension scheme. Customers were incorrectly advised to take out personal pension plans whereas the occupational pension was much better. Due to the greed of the sales persons many employers in reliable occupational pensions schemes were advised to terminate their contracts. It is estimated that over 5 million personal insurance pensions’ schemes were sold by banks, independent financial advisers, life insurance companies and building societies. Following the unearthing of the scandal the Financial Conduct Authority.FCA estimated that it would cost over £13.5 billion in redress and £2 billion in administration costs .This is as a result of lawsuits from customers who got inappropriate deals (Hawthorne, F. 2010, p.10). There are concerns about the sale of annuities, which is a lifetime insurance contract. The area of concern is the sale of annuities to people in poor heath but wish to get some income from their pension. Results from research indicate that 60% of senior citizens in their sixties should receive a larger annuity to account for terminal conditions such as diabetes, high blood pressure and high cholesterol (Hawthorne, 2010, p.23). However the Financial Conduct Authority (FCA) upon investigations discovered that only a small percentage of companies offered larger annuities to senior citizens. The FCA also discovered that the sales staff failed to ascertain the heath condition of the customers assuming that most were fit and lived active lives. The heath condition of the patient is very important in deciding the pension scheme best suited for the customer.FCA also noted that it was seldom for companies in the industry to enlighten others players in the market so that the customers makes an informed decision on the company and pension scheme availability (Hawthorne, 2010, p.27). The practice involves the arrangements made by the employer to give their employees’ pension after their retirement. The benefits for this pension lead to tax relief and extra benefits one can acquire for life insurance or for their dependent when they die. Either an individual can contribute to final salary scheme or money purchased scheme. Final salary scheme on has to base his contribution for pension in regards to the number of years one belong to the scheme and the earning one has. In contrary, purchase scheme depends on contributions one has made together with the amount of money your employer has invested or contributed to the scheme. The scheme can decide to pay you or buy an annuity from the insurance company, which will pay you on a regular basis after retirement (DIAMOND, 2005, p.22). Pension crisis in the current state of pensions industries in United Kingdom The government has reformed to pension framework by creating structural conditions for the sale of pension by private pensions that were slow to exploit. The result of selling pension by the banks, insurance companies and building societies many issues have raised in the recent years in United Kingdom. According to research findings, the current pensioners come from current working individuals or population by contributing through national insurance contributions. The outcomes imply that these kinds of contributions can sometimes refer to social contact between old generations and younger generations. As life expectancy in United Kingdom increases, the burden that it poses or places to the young generation also increases. As life expectancy improves with the unchanged policy, the extra cost will arise from reduced public spending, higher taxes or from government borrowing (GREAT BRITAIN, 2007, p.34). The system conducted to set down regulations in which the business for investment could take place. The main objective of the system was to protect the private investors from individuals selling financial services, and they do not have necessary skills. These people if not taken care of might exploit the investor again for financial. The creation of pension was the main product specified in the act. In the current year, the United Kingdom has no center that has specific responsibilities for detecting, analyzing trends or heeding early warning to enforce or monitor the planning pension strategy (GREAT BRITAIN, 2007, p.49). The importance of setting regulation in United Kingdom was to acknowledge and maintain high integrity. This encouraged the selling of pension and remuneration after the sale should be commission driven. In recent years the transfer value from the sale has gone to sales representative has a fee. Development of Personal pension intentions mainly carried out for self-employed, and the individuals employed but do not have access to the company scheme. The issue had risen when employees who already have their own occupational pension forced and persuaded to leave their scheme and take personal pension. The results to a big problem since no one can risk losing all what they have saved. The returns that an individual achieve relate largely from the pension plans to behavior of their stock market. When the pension has promotion, government does not provide good information on which pension can benefit an individual who want to start a pension plan. The problem also arose to those employees who already have company schemes on what to do. The information given has little impact, and the regulator does not consider the product being mis-sold (Great Britain and Great Britain. 2013, p.45). Reasons for acknowledging change in pension industries The changes have come across with many reasons. The factor enables individuals belonging to a certain scheme have ease in accessing their pension funds in full amount without having to purchase for annuity. After the budget for the United Kingdom announced in March 2014, several transitional changes follows that has some effect on the pension industry. These changes lead to an increased level in trivial commutation. The changes also help in retention of the tax-free lump with the remaining balance after tax saved as income. The new rule will allow individuals to bypass scheme to allow them give their employees increased flexibility (HILL, 2007, p.56). If the scheme provider fails to offer this new flexibility, the member has to transfer to this new arrangement in order for them to take advantage of new pension payment flexibility. The adaptation of changes in the pension payment will enable new member to enroll automatically without any barrier to the entrance. This process increases the number of employees who might have the will to enroll and save their money for future. Automatic enrollment enables everyone employed to enroll even if the individual has not attained the state pension age. This enables the employees to increase their life expectancy in the insurance company since they may long work period (Great Britain and Great Britain. 2013, p.12).Top of Form Engage stakeholders The adoption of change in the pension industries allows them engaged their stakeholder in making decision to which pension scheme to adopt. The stakeholder has a chance to contribute in the area concerning their capability and will in making pension payment. By involving stakeholders, they felt appreciated and recognized which lead to improvement and increase in their ability to pay for pension. Adoption of change will enable managers obtain the necessary information and educate their employees about the new duties and consequences if the fail to comply. This enables employers concentrate on their specific duties to enroll their employees and register them automatically. It saves managers time has they already have information on what they have to do and improve the employees enrollment level to contribute towards their pension (DIAMOND, 2005, p.12). Enables compliance The introduction of change in the pension industries enables the employer identify potential area or instances where employee may fail to comply. This gives them a chance to take necessary steps and measure to bring the employee back to the track. This also gives managers chance to interact with them and identify the various reasons that lead them not to cooperate and take measures to remedy the problem. Currently, most organizations encourage their employees to save some of their money into different accounts for consumption in the future. The money saved could help them satisfy their needs and wants at their old stage age when they will not have enough strength to work (Great Britain and Great Britain., 2012, p.10). This kind of saving for future use commonly referred to pension. Pension refers to payment that an individual receive after retirement. Pension also regarded as an effective method of saving money and regular source of individual income after the retirement. Planning for pension helps an individual to save and secure some income to use in future consumption. Planning for pension also helps one avoid being over dependence on other or become a liability to other people at their old stage. The crisis is linked to scandals 1980’s such as the Mis -selling scandal. The staff of major companies such as AVIVA sold impropriate deals to clients. The interaction between employer and employees adds value to the impact of the contribution towards pension after giving some advice. This help in increasing the number of the new member to enroll toward the pension for future use (Great Britain and Great Britain., 2012, p.19). Advised benefits to students in acknowledging change in pension industries Students should learn that the introduction of a new change to paying pension has huge benefits to individuals who build large pension pots. The building of large pots saves them from paying tax during the withdrawal of their amount that they have contributed. These results depend on employee personal allowance and any other earning that contribute a lot to pension leading to swallowing of tax. This release from paying tax encourages many members to participate in investing in many areas in order for them to have sources for pension and reduce tax. The introduction of change leads to expansion of the pension market to many insurance companies. This results due to freedom of entry to the pension area that allows many individuals to participate in contributing to future use. It enables the company offering pension sales increase their market thus benefiting from the profit they gain after the sale. The pensions industries also attract many individuals to save their amount for future as there no barrier for entry. This freedom of entry brought about by automatic enrollment regardless of the individual has attained the state pension age or not (HILL, 2007, p.21) The freedom of entry into the state pension enables young individual prolong their duration for working that result to high saving. The adoption of change leads to an increase in life expectancy of an individual since young employee has the freedom of moving from one job to another. The factor enables employee fraternity to gather more resources for their pension that contribute to increase in life expectancy. For an individual who has a long period of saving, it leads to individual having a lot for the future use. The practice also enables the pension industries invest a lot in individuals hence raising their market. The adoption of change in the procedure for acquiring pension for individuals enables them to save a lot for future use. Change in procedure means that an individual can engage in saving for his pension at any age and the young the individual the more the saving (Great Britain and Great Britain. 2013, p.36). As long as an individual has work, means that one becomes eligible for contributing towards the future pension gain. The younger the person, the more probable to save enough for future that why the new rule has brought more change towards saving. The introduction of new rules about the pension policy gives an individual opportunity to gather more information about the pension benefits. The more an individual obtain information about pension an individual gets to know the purpose if investing for the future. This enables the employee increase their knowledge about the pension and can encourage other to contribute towards the same. The knowledge gained also helps one to know which type of pension could suit him in regards to the income and the level of employment. It is advisable for one to apply for the pension, which he can manage and attain the maximum saving that individual, requires for future use (Great Britain and Great Britain. 2013, p.36). . Help and information about pension An individual interested in finding information about pension can get it from various sources. These sources will guide the individual accordingly and direct them on how to carry on the procedure for contributing toward saving for future income. They will also guide the individual on the best scheme of pension to adopt which has greater benefits to them. The information available help the individual weigh their potential and contribute towards what they can afford according to their level of income (HILL, 2007, p.10). These sources of help and information include. Pension provider can also help and give information to a new employee who wants to start the contribution towards the achievement of better pension in the future. The system administrator also provides the necessary information to guide the individual as they plan for the pension. An individual can obtain the necessary information from the scheme trustees who guide them on the best scheme to apply. They will give them the benefits of using certain scheme that will act as cornerstone for their start. They should encourage them to contribute towards the same since the pension received helps not to become a burden to the others when they get old (DIAMOND, 2005, p.56) Independent financial adviser An individual can obtain information regarding the distribution of the income one obtains and the pension. The financial adviser should guide the member on the best scheme to use in relation to personal allowances and the level of income. An individual should know the best scheme that suit, fit him/her, and make possible contribution towards saving for future use. The practice involves a service that deal with money and give necessary guidance to the individuals interested in saving for future consumption. They should help an individual in areas regarding how to spend money and which to save for future use. The individual should then know which portion of the income goes to savings and the one for spending. The advice given should act as a controller and director to the new member in regards to distribution of the income available (DIAMOND, 2005, p.30) This information should guide the individual on which scheme of pension on suits since the information about each scheme already in details. The website also directs the individual on where to get the pension one requires and whom to consult for clarification. An individual can obtain the information required from the websites of the public government about the workplace pension. With this information, an individual can know what to do in order to get the contribution for future use inform of pension (GREAT BRITAIN. 2007, p.26) The pension advisory service It belongs to an independent non-profit organization that makes and provides advice, free information and guidance on matters concerning pensions to individual. They also provide state, personal, stakeholder scheme and company information about the pension available and means of acquiring that pension by an individual. The organization also helps any person or member from the public who has a problem, dispute or complaint with private pension or occupational pension arrangement. The only thing that these people do not deal with complaints, problems or disputes that relate to state. They offer free services to individuals so has to encourage them in making proper decision. The actual location for this regulator is in United Kingdom. They provide basic information to employees interested in contributing to their savings. They ensure that the information required about pension available on their website to make it easier for members access. This information will help an individual select the best scheme for their pension and the one affordable to the (GREAT BRITAIN. 2007, p.58). Conclusion An individual should have a concern to enroll for pension that account for the source of income to sustain individuals life after retirement. Individuals should understand the need for having pension after on ceases from doing job, and it help one to continue with life after retirement. Members as to make an effort in knowing the different types of pension in order to know the best that suits them base it on their income. The planned and availed pensions have various categories inclusive of state pension, occasional pension and personal pension. The advice to new member interested in contributing towards saving for future should take a pension scheme according to his pocket. One should also know that there many sources to obtain help and information about pension like pension advisory service and many others has discussed. The individual should seek for the best information to direct and guide while making decision about pension scheme. Bibliography GREAT BRITAIN. (2007). The Pensions Regulator: progress in establishing its new regulatory approach : report. London, TSO. DIAMOND, P. A. (2005). Reforming public pensions in the US and the UK. London, London School of Economics and Political Science. HILL, M. J. (2007). Pensions. Bristol [England], Policy Press. Great Britain and Great Britain. 2013. Improving governance and best practice in workplace pensions: Sixth report of session 2012-13. London: Stationery Office 2013 Great Britain and Great Britain. 2012. Government response to the consultation improving transfers and dealing with small pension pots. London: Stationery Office, 2012 GREAT BRITAIN. (2013). The single-tier state pension: part 1 of the draft Pensions Bill : fifth report of session 2012-13. vol. 1, vol. 1. London, Stationery Office. BLAKE, D. (2003). Pension schemes and pension funds in the United Kingdom. Oxford, Oxford University Press. BUCKLE, M., & THOMPSON, J. (2004). The UK financial system: theory and practice. 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