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Pensions (Defined benefits (In the UK, it was standard practice for an…
Pensions
Defined benefits
In the UK, it was standard practice for an employee to participate in a defined benefit scheme
The retiree would receive a defined annual pension from their normal retirement date. The date was usually when the retiree attained 60 or 65, but it is now as low as 55 before pensions can be accessed
The amount of the defined benefit was dependent on a number of factors, including the amount of final salary, number of years service
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There are also various options open to employers where they are still operative, they can phase them out completely or close entry to new employees
At retirement they would be able to take 25% of their value as a cash free lump sum while taking the remaining 75% as a monthly salary
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The onus of ensuring that the retiree receives their defined benefit is the responsibility and in those circumstances where an actuary has identified a shortfall in the pension fund the employer may have to fund the shortfall
There will be a pension contract between the employer and employee with most of the pension contributions being made by the employer but additional voluntary contributions can be made by the employee
State pensions
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Pensions are mostly funded by the working population, but could still be partially funded by the individual retirees if they continue to be basic rate or higher rate tax payers in retirement
Following the credit criss of 2007/2008, coupled with the face that people are said to be living longer, the UK state pension age was raised from 65 to between 66 and 68
It is probable that this will be increased further to 70-75 and will eventually be phased out depending on its degree of sustainability
Due consideration should also be given to the fact that the state pension may be subject to income tax if the retirees other income taxes he or she over the relevant threshold
As the state pension is spent, it will be subject to indirect taxes including VAT
Personal pension savings are a feature in many countries because they relive governments of the commitment to provide completely for pensioners in their later years
The funding of these varies and if they are dependent on the contributions of the working population, they may create a financial strain on a country if the ratio of retirees to working population is too high.
Japan is an example of a country with a high ratio of retirees to working population, whereas the Scandinavian countries have made provision for a more robust state pension scheme for future retirees
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Defined contribution
The employer will make a defined contribution, for example 10% of annual salary into a pension fund in the name of the employee
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The employee has the responsibility for ensuring that there is enough in the fund to be able to fund a desired lifestyle at retirement, either by making additional contributions which will have various tax benefits or by managing the pension pot by switching from fund to fund
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The investment returns achievable both during the time the funds are invested in the pension scheme and at the employees retirement will also affect the amount they can receive in retirement
The financial security of defined pension schemes where a shortfall has been identified, however if the employer cannot finically or is unwilling to fund the shortfall. This will become an increasingly large problem as more employers fail to fund the shortfall or ask employees to take a reduction in the defined benefit on which they had been depending. Recent examples include
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In 2015, the Chancellor of the Exchequer introduced so called pensions freedom which afforded retirees more control over their retirement savings / pensions. The retirees / pensioners were able to have full control over their pension pot including in the extreme to take out and use the entire fund as they wished, subject to taxation. This pension freedom has already caused a lot of issues including pensions being cheated out of the entire funds by scammers
A pension is a fund comprised of savings put aside throughout the course of a working life. The purpose is to support a retiree in later life
It is hoped that the money received will be adequate to support their desired lifestyle in retirement, however this might not be the case if the retiree has made inadequate provisions
The amount that can be contributed to a personal pension throughout a career is determined by government legislation because of the tax breaks available
Most countries require that employers provide an additional pension scheme for employees, especially if it is considered that the states scheme may be inadequate in future years
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If an individual has worked for 40 years, they may have a number of different pensions of different types from a range of employers consequently they may have a defined benefit, defined contribution, SIPP and state pension, while others may be solely dependent on the state pension