Question 6.5 Outline some possible ways in which the State might regulate personal pensions purchased by individuals from insurance companies. One of the answers is: setting terms for contracting out of the State provision (if that is allowed) I didnt understand what is meant by the above statement. Also, one of the answers is: providing tax incentives or taxing providing tax incentives or taxing contributions, investments and benefits How will taxing contributions, investments and benefits encourage provision of benefits? (the section is about encouraging benefit provision)
"Contracting out" is probably a bit technical, but individuals might be allowed to chose to not contribute toward a State pension. This means that upon retirement they won't be entitled to a pension from the State, but in exchange for giving up this benefit they'll be required to pay less tax while they're working (since they're not paying the pension contributions). These additional funds could be used to invest in a personal pension instead. In your second point, using tax incentives is a major way in which the State might encourage investment in personal pension plans. For every £1 an individual saves into a personal pension, the State might be prepared to boost this by the amount of tax already paid on it. This makes saving for a pension a tax efficient way of providing an income in retirement.
Thanks Steve. In that case, shouldn't the answer mention that the State might be prepared to boost this by the amount of tax already paid on it? Because, if one only reads the standalone statement, it would imply that taxing contributions is a means of encouraging benefit provision, which is counter-intuitive.
I see what you mean, maybe. The question though is about areas that the State might regulate, and one of those is definitely how contributions are taxed. I guess the assumption is that the taxing of these contributions would want to be favourable, but that's not really what the question is after.
