Understanding pensions

A quick guide to pension basics - what pensions are and how they can help you

It’s important to understand your pension is a long-term investment. Its value can go down as well as up and you could get back less than was paid in.

How pensions work

Pension plans are a way of saving for the future. With most workplace pensions you and your employer pay in while you're working. Then when you're ready to slow down or stop working you can use it to support yourself - as long as you've reached the minimum pension age.

This video explains the basics:

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Let's take a closer look at how your pension works. First of all, who pays in?

Your pension is money for you for the future. That means it's up to you to pay in what you can and make sure you're on track. There may be some minimums set by the Government or your employer.

Don't worry, you won't have to go it alone. You may have support from your employer. Your employer's payments will depend on the conditions they offer. For example they could pay a fixed amount or may match your payments up to a certain amount. It's worth checking as by paying just a little bit more, you could get more from your employer.

Pensions are a tax-efficient way to save. Depending on your income range and type of pension, you could receive valuable tax benefits from the Government.

But what is happening to your money?

Your money is held in investments within your pension pot with the aim to make it grow as much as possible over the long term for when you retire. However, investments can go down as well as up in value and there's always a chance that you will get back less than what was paid in.

You can choose where your money is invested and the risk you're willing to take. For example, if you're far off from retirement you may choose to take more risk than someone closer to retirement. Investing early could give your money more time to grow.

What happens when I retire?

Currently, when you turn age 55, you can choose how to access your pension savings. The way you take your pension will depend on what matters to you and the kind of lifestyle you want. Remember that age 55 for taking your saving may be changed in the future.

When you retire, you can normally take up to 25% of your pension savings as tax-free cash. What you use it for is up to you. Keep in mind that tax rules can change. The value of tax relief is dependent on your individual circumstances.

What's important though is to make sure you have enough money to keep you going for the long term. You can use the rest of your pension pot to create an income for yourself or take it all as cash which would be taxed.

Some pensions let you take a flexible income, which means your pension savings stay invested, but you can take out money to meet your changing needs. How long your pension pot lasts depends on how much you take out - and how your investments perform. Remember as with all investments there is risk involved and you could run out of money.

If you don't like uncertainty and prefer the reassurance of an income that will last for the rest of your life, you can use some or your entire pension pot to buy a guaranteed income for life. This is called an annuity.

What happens if I die?

If the unthinkable happens, any money remaining in your pension pot can normally be passed on. Please ensure you've updated your beneficiaries, which you can now do online.

To sum up...

You and your employer and the government can all pay into your pension
Money in your pension pot is invested so it has the potential to grow, but there are no guarantees

There are different ways to access your pension pot when you start to take your benefits.

You get more than your own contributions

The money you pay into your plan is topped up in two ways:

Employer contributions: Centrica will pay into your pension plan as well.

Tax benefits: A pension plan is one of the most tax efficient ways of saving for your retirement.

Your contribution

Tax benefits

Contribution from your employer

Total amount invested

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For more information about how this works, download our Guide to tax relief, limits and your pension (PDF 359KB)

Please remember, laws and tax rules may change in the future. Your own circumstances and where you live in the UK also have an impact on tax treatment.

Why start now?

Saving into your pension plan may not feel like a priority when you have other expenses to deal with. But it can have a big impact on your lifestyle in retirement.

The money in your pension plan is invested, so it has the potential to grow over time. That means starting earlier can make a big difference. Imagine you start at 25 years old and earn £25,000 a year. The chart below shows how starting to save a slightly higher percentage of your salary affects the final pension pot you could potentially build up.

: These figures are illustrations only to demonstrate the potential growth of your pension. What your pension will be worth depends on how much you pay in, the charges you pay and how your investments perform. As with any investment, the value can go down as well as up and may be worth less than what was paid in. There are no guarantees.

You may get more or less than illustrated. The payment percentages and earnings may not represent your circumstances - for other payment or salary levels the figures can be adjusted proportionately.

Some types of investment or savings plans, for example a savings account or a cash ISA, do not take account of inflation, so may look more attractive than they actually are if you're comparing them to this illustration.

These figures are shown in today's prices. We've made some assumptions: that the tax and pension regulations don't change (based on our understanding of these as at 6 April 2022) and that you'll retire at age 65.

It also assumes that you make payments each month, that your earnings will increase by 3.5% each year, that your annual charges will be 1% and that your investments will grow at 3% a year (you may get more or less than that). In line with Financial Conduct Authority rules, the growth rate has been reduced by 2% to allow for inflation. The figures provided don't allow for any special terms that may apply.

It's your money (even if you change jobs)

You have a right to the money in your pension pot, even if:

You change jobs
Your company changes hands or ceases to exist

What happens if you leave your job?

If you leave Centrica you will no longer be able to pay into your plan. Your plan will remain invested until retirement. Charges will continue to be applied to your plan, but you won't lose your rebate due to leaving your employer.

You'll still be able to change your investments and keep full access to your Standard Life account even if you leave your job. You will also have the option to transfer your pension account to another pension arrangement.

Your options in retirement

You can normally access the money in your pension from age 55 (rising to 57 from 6 April 2028).

You don’t have to decide yet, but when you get to that stage it's up to you how you use your pension money.

You can:

Get a flexible income: Leave the money in your pension pot invested and take a regular income from it. You can change the amount as you go.
Get a guaranteed income for life: Buy an annuity, which gives you a guaranteed income for life. You can't change this later.
Take a lump sum(s): Take cash from your pension pot in one or more lump sums. The first 25% is normally tax free.
Combine your options: You can take a combination of any of the options above, for example take a lump sum and buy an annuity.

As a DB member, you also have the option to use your DC pot built up in the DC scheme aligned to your main DB scheme when you take your retirement from your main DB scheme. For example you could use this DC pot towards any tax free cash sum you may wish to take.

Please note, to access some of these options you may need to transfer to another pension plan.

When it comes to arranging your retirement income, we would always recommend that you shop around because other providers may offer a higher level of retirement income and access to different options that could suit you better. We also recommend you seek appropriate guidance or advice to understand your options at retirement. From age 50 you can get free impartial guidance from Pension Wise - a service from MoneyHelper

You can also log in to your online account and use our personalised tools to help you understand which options might be right for you.

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Plan your retirement

Once you've joined your pension plan, you can login to MyPension to manage it. You can make changes to your plan, and find guides and tools that will help you understand your retirement savings.

Looking for financial advice?

A financial adviser can help you plan for the future and help you get the most out of your pension plan. Financial advice will cost money, but it could help you be better off in the long run. An adviser may provide their first consultation for free and then discuss their fees for ongoing support.

If you want to use a financial adviser, you should always make sure they're authorised by the Financial Conduct Authority (FCA). The government's MoneyHelper service has a useful guide to help you find a financial adviser

If you're looking for help with your company pension, or other financial matters, but don't think you need a financial adviser, you can always use the government's free, impartial Money Helper service

Explore our guides

Understanding investments

Find out how and why the money in your pension plan is invested.

Learn about investment basics
Boosting your pension

Topping up your plan is easy and it could help you have the retirement you want.

Find out how to boost your pension
FAQs

Get answers to common questions about your plan and pensions in general.

Read the FAQs