The Pensions Primer
The pensions landscape in the UK is complex. The foundations of the UK pension system were laid in the 1940s. Since the 1960s, successive governments have changed both the state and private pension elements. This document is intended to provide a description of the UK pensions
system for the purposes of considering pensions policy. It should not be used to make individual pensions decisions.
This Pensions Primer gives a detailed description of the current pensions system and some of the archaeology of these layers. The Pensions Primer is intended for people wanting to learn about UK pensions policy. It should not be used to make individual pensions decisions.
This version of the Pensions Primer reflects the current position of the UK pension system as at 17 November 2011. Any changes in Government policy that may have occurred after that day are not included in this version of the Pensions Primer.
The Pensions Primer uses a box format to explain changes that have been legislated in Acts of Parliament but that are not yet applicable. For example, auto-enrolment into private pensions, which was legislated in the Pensions Act 2008 but will not begin to be introduced until October
2012. Boxes are also used for areas in which the current Coalition Government has announced a change in policy that has yet to be enacted by Parliament, or areas in which it is consulting on future policy changes.
To explain the UK system, this report uses a multi-tier framework. As it stands today, the UK pensions system has three tiers:
· Tier 1 is provided by the state and consists of a basic level of pension provision to which everyone either contributes or has access, providing a minimum level of retirement income.
· Tier 2 is also provided by the state and aims to provide further pension income that is more closely related to employees’ earnings levels. Tier 2 is less redistributive (from rich to poor) than Tier 1. Tier 1 and Tier 2 operate on an unfunded ‘pay-as-you-go’ contributory basis, through the National Insurance (NI) system.
· Tier 3 is private pension provision, namely all those voluntary pension arrangements that are not directly funded by the state. Private pension contributions, from the employer and/or the individual, fund designated pensions for the individual. The primary aim of private pensions is to redistribute income across an individual’s lifetime, and not to redistribute income from higherincome to lower-income people.