It is hard for a young person just starting work to acquire any sort of enthusiasm for comprehending pension plans. What is going to happen upon his or her retirement 40 or so years later seems too remote a prospect for it to have any relevance in the present.
But such an attitude is unwise, for you will be involved, like it or not, in helping to pay for pensions as soon as you start work. If you become a member of a company pension scheme you will probably be paying towards the cost of your own eventual pension throughout your working life. And, as far as the state pension is concerned, part of your gross wages every week will be deducted from your pay in National Insurance contributions and will go towards the cost of the state pension for today's old-age pensioners.
So you ought to know, as soon as you start full-time employment, roughly what amount of pension you are going to be entitled to and, just as important, who is going to contribute towards its cost and what that cost will be.
Pensions are a complex subject, but taken slowly, step by step, the principles involved are easy to understand. There are two entirely different kinds of pension - the state pension and the so-called occupational pension. Let us deal with these in turn.
The state pension
All persons in paid employment and with a satisfactory record of National Insurance contributions become entitled to the state pension on retirement at age 65 if a man, or 60 if a woman. The state pension consists of two parts - the basic flat-rate pension and the earnings-related additional pension. Both parts are protected against inflation, and the earnings-related part will be based on the pensioner's actual average earnings before retirement.
A John Jones is offered a choice of terms as a salesman for the products of a company. He may be paid a fixed salary of £30,000 plus commission on his total sales at 5%, or a salary of £4,000 plus commission at 7.5% but only on sales exceeding £50,000 in value per year. Assume that total sales for the year will amount to £70,000 in the first year and £85,000 in the second year.
Which formula will give John the higher total remuneration in the first year? And which in the second year?
B Jan Peters, who is very interested in and knowledgeable about electronics, has a choice of... see: Methods of Payment Exercises