PENSION IN THE UK

Pension in the UK: Reform reason and effects



Pension in the UK: Reform reason and effects

Introduction

The aim of this essay is to perform an analysis of the UK pension system, understanding its foundation and working. The core focus is to assess the statement “the UK pension statement is fatally flawed and requires that we make fundamental changes in the way we save for old age”, by referring to the Pension Commission Reports, and the relative proposals that have been made recently.

The generic understanding of the term 'pension' is the arrangement by which people who are no longer in employment are provided a form of income. It can also be considered as a form of savings, in which one accumulates funds without any taxes, to utilise later as retirement income. The chief difference between pension and a severance package is that the former is paid in regular instalments, while the latter is paid as lump sum at the time of departure from employment, or shortly thereafter (Dimson, 2002).

Where pensions are granted at the time of retirement from the workforce, they are referred to as retirement plans or superannuation. The flexibility of the retirement plan is that it can be set up by employers, insurance companies, government or trade unions, to cater for the needs of the workforce upon its exit from employment due to reaching the maturity age that is pre-decided as the point to move out. This is normally at 60 years, although recent changes have pushed it to 65 years (Daykin, 2002, pp. 111-119).

Pension is referred by different names in different countries; the Americans call it a retirement plan, in Australia it is known as superannuation, and in the UK it is regarded as pension scheme.

Discussion

Types of Pensions

In order to analyze the pension system objectively in light of the documents, it is important to understand the different types of pensions. There are three common types of pension in practice around the world. These are:

Employment-based pensions: Often regarded as a deferred form of compensation, this is primarily an arrangement between the employer and employee, aimed at providing a steady income to the employee once they are no longer in employment due to reaching maturity or retirement age. Both employer and employee make regular contributions to this fund during the period of employment.

Social / State pensions: These are funds created by national governments for the benefit of their citizens and residents. Contributions into these funds are made by the nationals of the country throughout their working life, and the benefits they end up receiving after retirement are based on the contribution history. Two known examples of this type of pension are National Insurance (NI) in the UK and Social Security in the United States (US) (Disney, 2003, pp. 56-63).

Disability pensions: A more specialised form of pension that is designed to provide a regular payment if the member suffers a disability. In some cases, social pensions contain a disability clause which ensures a regular income to individuals should they ...