An arrangement in which an individual contributes part of his or her salary to a pension provider, such as an insurance company or a bank. The pension provider invests the funds so that at retirement a lump sum is available to the pensioner. This is used to purchase an annuity to provide regular pension payments. In the UK the system is that an employee who chooses a personal pension instead of the Second State Pension, or their employer's pension scheme, must pay National Insurance contributions at the full ordinary rate and the employer's share must be paid at the same rate. The state pays the difference between the lower contracted-out rate and the full ordinary rate direct to the personal pension scheme. The administration of pensions is scrutinized by the Financial Ombudsman Service, which is empowered to deal with complaints relating to personal pension schemes. See also stakeholder pension scheme.
Subjects: Financial Institutions and Services.