ABSTRACT
In most developed countries the pension system has three components.First, there is a state pension that aims to provide a basic retirement income for everyone. State pensions are financed from current tax receipts. Pensions financed from current revenues are referred to as pay-as-you-go pensions. In the UK there is a basic state pension plus an earnings-related state pension known as the state second pension. In the UK there is a pensions tax credit whose function is to guarantee a minimum level of income, which exceeds the basic state pension.The pensions tax credit adds to the basic state pension on a means-tested basis. If a retiree has pension rights in addition to the basic state pension (e.g. state second pension, occupational pension, private pension), the pensions tax credit is reduced by 40p for every pound of additional pension. If the additional pension exceeds a particular level, no pensions tax credit is payable.There is concern that the pensions tax credit may deter people from saving for a pension since the private pension receipts would reduce entitlement to the pensions tax credit. Unlike private sector pensions, state pensions are backed by the ability of the government to tax and borrow (this guarantee extends to other state-funded pensions such as those of civil servants, the armed forces, and teachers).
