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Consumer  >  How a pension works  >  How a pension works

How a pension works

This section of the website explains in simple terms how a pension works.

The basic principle behind a pension is that you make payments, whether on a regular basis or as one-off amounts, to an insurance company to help you fund for your retirement. These payments are invested on your behalf in a range of different investments to build up a 'pot of money' that is then used to provide an income during retirement.

These investments are commonly known as funds and most insurance companies offer a selection of funds that invest in different types of assets, for example equities (company shares) or property. The objective of most funds is to invest in assets that will increase in value over time, although this cannot be guaranteed as the value of certain assets can go down as well as up.

When you reach your selected retirement age you take the money saved up in your pension and use this to provide an income for the rest of your life by purchasing a financial product called an annuity from an insurance company. This could be from the same company that provided the pension or a different company. As well as providing an income for life, in most cases, it is possible for some of the pension pot to be taken as a tax-free lump sum before you buy an annuity.

• Making payments
• Investment options
• Options at retirement
  
• Death benefits
• How to start a pension
• Pensions A to Z

References to taxation are based on our understanding of current taxation law and practice and may be affected by changes in legislation or by an individual's particular circumstances.