Economic theories explained: What is capitalism?

Stock market traderSome people love it, some hate it, and it is the economic system under which we live in the UK.

But do you really understand how capitalism works? We explain the ins and outs of a capitalist economy and investigate its pros and cons.%VIRTUAL-SkimlinksPromo%
The definition of capitalism
According to the Oxford Dictionary, capitalism is an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state.

How capitalism works
In a capitalist economy, investors are free to buy, sell, produce, and distribute goods and services with at most limited government control, at prices determined primarily by a competitive, free market.

The central elements of capitalism, which is now the dominant economic system worldwide, include capital accumulation and a pricing system.

The history of capitalism
Following the demise of feudalism (characterised by powerless peasants, or serfs, working the land for their feudal lords) in the 15th Century, capitalism became the most common economic system in Europe.

The different kinds of capitalism
Various forms of capitalism have been tried throughout the years. These include laissez-faire capitalism, in which the government essentially leaves the economy and the population to find their own way, and welfare capitalism, which involves greater state intervention, for example, to help those struggling financially and to regulate to prevent monopolies.

The arguments for and against capitalism
Fans of capitalism claim that it is the greatest wealth-producing system known to man, and that it brings significant benefits for the working man.

But critics of the system associate it with economic instability and argue that it fails to create a level playing field for people of all backgrounds.

What do you think? Is capitalism working? Or does it just help the rich get richer?

7 ways to improve your retirement
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Economic theories explained: What is capitalism?

If, like many Britons, you have failed to save the cash you need to maintain a comfortable standard of living in retirement, one option is to sell your home and downsize to a smaller property, using the money leftover to cover your living costs.
If moving out of the family home is too much of a wrench, however, the good news is that equity release schemes allow you to stay in your house or flat while still using the equity built up in it to provide some extra cash. The downside of the schemes, which work a bit like mortgages, is that you may not have much left to pass on to any children or other relatives.
But that's a small price to pay for a reasonable standard of living. For more information, try Age UK on 0800 169 6565.

Choosing the right annuity can have a significant impact on your retirement income. And as with most pensions, you automatically have what's called an 'open-market option' (OMO), you can scour the market for the highest annuity rate.
It is worth checking what your pension provider is offering first, though, as some companies offer guaranteed rates for existing customers that are likely to beat those available elsewhere. The Pensions Advisory Service on 0300 123 1047 is a good place to get some free advice.

On retirement, most people convert their pension fund into a guaranteed income annuity that pays out the same amount every month for the rest of their lives.
However, you can also choose an increasing annuity that pays out smaller amounts in the first few years but offers larger payments further down the line. This may prove a wise move if the rate of inflation remains at over 2%.

It is now easier to work later in life because the "default retirement age" has been scrapped.
People approaching retirement age and worrying about money can therefore choose to work for a few years longer - potentially transforming their financial situation. Other than the extra income from working, these people can look forward to higher state pensions, and higher annuity rates due to their greater age.
They can also benefit from bigger tax allowances and the fact that they no longer have to pay National Insurance contributions. Check out this nidirect website for more details.

You could get a much better rate with an impaired-life annuity if you have a medical condition that is likely to reduce your life expectancy.
Incredibly, even snoring, which is a common symptom of Sleep Apnoea could have an impact.
According to figures from MGM Advantage, a man with this condition could receive an extra £12,000 retirement income over the course of their retirement - or £571.44 extra money each year. Click here to find out more.

To maximise your retirement income, it is vital to ensure that you are receiving all the benefits to which you are entitled. These include the basic State Pension, and in some cases, the additional State Pension.
If you are on a low income, you could also qualify for the guaranteed element of Pension Credit, while those with some savings may get the savings element of this benefit. For more information about these and other benefits such as the Winter Fuel Payment, click here.

Many older couples rely on the pension income of one person - often the man. Should that person die first, the other person can therefore be left in a difficult position financially.
One way to prevent financial hardship for the surviving person is to take out a joint life annuity that will continue to pay out up to 67% of the original payments to the surviving partner should one of them die.
The disadvantage of this approach, however, is that the rate you receive will be lower. Again, the Pensions Advisory Service on 0845 601 2923 is a useful first port of call if you are unsure what to do.

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