INDIVIDUAL FINANCIAL AWARENESS

Individual Financial Awareness

Individual Financial Awareness

Overview of the topic

Bill Murray's friend John aged 35 has recently accepted a job offer with the option of contributing to a “money purchase” pension scheme. John is not keen on thinking about a pension at such a young age, but he has read something about the “pension crisis” and has a nagging doubt that maybe he should be doing something about a pension. Therefore, these are different questions which will be answered in detail.

Detailed Answers to the Questions

There are some reasons because of which the pension crisis occurred in the country. The major reason was the financial crisis that affected the ability of the UK Government to help its citizens in paying the pension money. All the banks were bankrupt that had the savings of the people which was also a major setback for everyone. The taxes of the Government were utilized at that time to manage the effects of financial crisis at that time. The UK Government was then in a position to pay the amount of pension to the public. John should invest some of the money in the pension fund which would prove to be useful for him in the future. Therefore, these are the reasons because of which the pension crisis took place in the UK (Harrison, Waite & White, 2006, 23).

A pension plan is an arrangement in which the employers and employees contribute a certain percentage based on their annual earnings. It is done on the basis of the guidelines defined in the plan. During the retirement, the total amount of the capital in the member's account can be utilized in order to purchase a lifetime annuity. The amount usually differs in the money purchase plan of all members. The main factor is the dependence on the level of contributions and the investment return earned on most of these contributions. In the money purchase plan, the risk for having an appropriate level of retirement income is dependent on the employee. This particular plan is different as compare to the defined benefit pension plan. The difference is that the employer has an obligation to make sure that the plan has adequate funds which increases an opportunity to increase the risk between the employer and plan members over the period of time (Harrison, Waite & White, 2006, 23).

It is no doubt that at the moment John is young because he is just 35 years old. However, it does not mean that John should not invest money in the pension fund. The reason because of which he should save money in the pension fund is that this money can be used by him in the future. There can be any need in the future and the money which would be required at that time would be utilized from the savings in the pension fund. Therefore, it is quite clear that John must invest money in the pension fund.

The total tax liability would be quite high for the Fred ...