How to Translate Your Pension Statement

With the roll out of Auto Enrolment millions of people now have a pension plan. A good number of these will be first time investors in a pension and as such they will be receiving paperwork about their pensions for the first time as well. One of these is a 24 year old relative of mine who chose to run with the idea on the basis that it was going to be a way of squeezing a bit more money out of her employer “so why not”. I don’t think she was alone in that line of thought.

Her first statement arrived a few weeks ago and like many people she scanned the ten pages of information until she found the figure she was interested in then put it back in its envelope. Then, unlike many people, she gave it to me and said “Is there anything in here I should know about?” My answer was “Yes, all of it”. Her look of disappointment was obvious and I think her plea of “Can you just translate it for me, I have no idea what half of it means” was a combination of lack of interest combined with the knowledge that she shouldn’t have a lack of interest.

She is not slow to understand things by any means, for what it is worth she has a MA and holds down a fairly responsible job with a lot of admin, but there is something about a pension statement that seems to repel her, and most people’s, interest. Whether it is the fact that it is full of stuff a regulator says must be in it, no matter how dull or irrelevant,  or whether it is a useful reminder of the ageing process I do not know, but I’ve yet to meet anyone that has read and completely understood (as opposed to thought they understood) the annual statement. With this in mind, I thought I would use her correspondence as a template and attempt to both translate it into normal, point out some of the more relevant bits, and provide a few tips about using the information for the power of good.

So here it is, a brief translation of the annual pension statement. Personal research has shown that making a cup of tea before reading is helpful!

Name and Address

This bit seems easy, but you would be surprised just how many problems follow from getting this bit of information wrong. A pension is a legal contract and as such the information within it has to be correct. This means the spelling of your name has to be correct and the address has to be your current one. When the time comes to take benefits from the plan, you pension provider will want to make sure you are who you say you are. Any discrepancy, no matter how small, has the potential of delaying your claim to your money at retirement. You must keep your pension company up to date with changes of name, title or address.

Letter and Statement

The correspondence you will get from your pension provider will consist  of a statement and a covering letter at the very least. There may well be other stuff, but these two items will always be there. Think of the covering letter as one of those round robin letters you get from a distant relative at Christmas. It will include references to how good the company is, any awards they may have got and proud boasts about particular fund performances.  it is likely to also make reference to some of the more important pieces of information in the statement, partly because they are acutely aware that only a small percentage of people actually read the whole statement. Regardless of the motives in putting information in the covering letter, you should always read it and if there is something you want explaining further, make sure you ask.

The actual statement is part fact, part conjecture and part what the regulator insists should be in it. It is important that you understand which category each piece of information falls into and I will cover this further as we go on.

TIP!

If you are getting a paper statement, scan it straightaway. if it is already digitised, then make a folder for it and subsequent statements you may get. Password protect the folder (encrypt if you feel happier to do that) and back up remotely.

So What is In The Statement

To start with, there will be a lot of different account details. Your pension plan could have all or any of the following:

  • A plan number – This will be your own plan number relating to your own personal pot of money within the scheme.
  • Your details as the Planholder – Check that all your personal details are correct
  • Scheme name and scheme number – These are the details of the overall scheme of which you are a part. Typically the scheme name will include your employer’s name.

You need to make a note of all of these and keep them safe.

A statement may well consist firstly of a summary and then a more detailed explanation. The summary will usually just give you a value of what your pension is worth, how much has been paid in and by who and a indication of what it may be worth at some point in the future. Additional information may include such things as what it might pay to your estate should you die.

Plan Value

The value of your plan will be the given value on the date of the statement. In terms of absolute accuracy, it will be wrong by the time you get it, however any differences will almost always be so small it is not something of great concern. Unless you are of an age where you are able to take benefits from the plan, knowing the value has two main purposes. firstly you can compare it with the amount that has been paid in and if it is more you can allow yourself to be appropriately chuffed depending on the amount of profit you have made. if it is less then you can dig further for an explanation as to why. The second reason is that it is also representative of a transfer value. Your plan is designed to be fully transportable between jobs and even into self employment. If you are changing your work in any way then finding out the transfer value and exploring the options open to you is a must.

Knowing how much has been paid into the plan is important. As is knowing where those payments come from. Typically there are three sources of payment into your plan: Your employer has to contribute, and there are strict rules as to how much they must pay in as a minimum. When you originally joined the scheme you would have been given a guide showing these figures, as well as the minimums and maximums that you can choose to pay in yourself. The third source will be any transfers into this plan from any other plan you may have previously held.

 

TIP!

Add up the total of what has been paid in and deduct it from the plan value in order to find out how well your plan has done over the course of the year.

What You May Get Back at Age 65

This part of the statement is most definitely conjecture. So much so that I can guarantee that the figures you are looking at will be wrong. The younger you are the more wrong they will be. This is because no one can predict all the variables that will actually happen during your working life such as how your income, and therefore the related contributions, will rise, inflation and investment performance.

The best that can be done is to use some regulator approved default predictions so that a figure can be put down. as you get older, this prediction can become a little more relevant year by year due to the fact that as you get nearer retirement, the variables will get narrower. The secret to getting a good return in a pension plan is usually to feed your plan as much as you can throughout your working life so that as the date of your retirement gets closer you will be nearer the amount of return you would like.

Most statements will show a figure at age 65. even though it is a fact that retirement for most will be at a later age than that. If you want to find out your own retirement age have a quick look here to find out. it will only take a minute. I cannot emphasise enough that you should be treating any illustration of what you might get as a pension with caution, especially if you have forty years plus to go before taking it!

TIP!

You can request that your provider send you an illustration of what your pension may be at any age, so long as it is after 55.

Plan Details

By this I mean details about how your plan is invested. When you first joined you would have been told of various funds that were available to you. You may have been offered a “strategy” whereby funds are allocated to you automatically according to to your attitude to risk or age. One theory suggests that you may be more open to higher risk when you are younger, but will gradually get mare cautious as you get older and feel you cannot accept the chance of losing money as you get close to retirement.

Here we have probably the most crucial aspect of your pension. Risk. The choice you make as to what funds or “strategy” to go for will, over time, have a huge impact on how your pension performs. There are endless guides and articles available to you concerning investment risk and all I’m going to do here is implore you to read as much as you can stomach.

As a minimum, you must read all and any information given to you by your own scheme provider.

If you are not sure of where you fall on the risk taking spectrum, then you must keep asking them questions until you are comfortable. It is worth noting that there is no point asking your employer, they are not allowed to advise you, you must ask your questions to the provider, or any advisers appointed by your employer.

TIP!

Keep a separate note of your plan number(s) and your provider’s contact details.

Charges

Imagine you have just ordered a round of drinks. the barman pours your tipple of choice into a glass, but before he gives the drink to you he takes a sip. This is how investment charges work. You give a company your money on the basis that you want a good return on that money, but before it has a chance to grow anywhere, a little chunk is taken by the provider. the size of the charge can vary, but within the auto enrolment environment these are strictly controlled. Again, you need to read and understand how the charges affect your plan. They are provided to you at outset and are easily available on your provider’s website. you can even just call them and ask.

If you do not get to grips with the charges you could find yourself losing out on quite a bit of money over time just by being in the wrong fund for you.

As well as charges that come as part and parcel of the investment element, there may be other charges, such as surrender or admin charges. You need to find out about these before you do anything that may attract them. Just ask.

Contrary to popular urban myth, all providers want you to understand their product. Dealing with complaints and misunderstandings uses up huge resources and they would rather have a client who asks a lot of questions but ends up happy with what is a fairly complicated product, than someone who doesn’t ask or read the information at an early stage and then starts a complaints procedure.

What If I Die Before Retirement?

Not a great thing to dwell on, but we have to acknowledge the possibility. In short, the value of the fund will be paid to your estate. However, I would strongly advise you to check out a part of your plan called “Expression of wish”. This is an instruction you can include in your plan specifically asking your provider to pay the proceeds of the plan to a named person (or persons). The provider is not legally bound to follow the instruction, but it is highly unusual for them not to do so.

And Finally….

The statement is important and you should read it. Somewhere it will say about getting advice, it will probably suggest you speak to a financial adviser. I would wholeheartedly endorse the idea of taking independent advice (there is no point in anything other than independent advice) from an experienced and qualified adviser. However, going back to my young relative’s statement covering her first pension year, it had a fund value of less than £100. Currently, the cost of getting good advice is going to be higher than that. So it is hardly surprising that she won’t be going down that route, and, I suspect, neither will the majority of her contemporaries. Given that, there are still things you can do such as always ask your provider about anything you are unsure of. read everything you are sent and do your own research regarding plans, funds and charges.

Over the last thirty years pension provision has changed beyond recognition. major changes in legislation have occurred with monotonous regularity. So it is a safe bet that the current rules and regulations that come with this latest idea of auto enrolment will not be the rules and regulations that will be in force when you finally come to take  your benefits at age 55, 65, 68 or whatever it will be.

Given that it is certain that changes to pensions will continue to be made, it is crucial that when your annual statement drops on the doormat you take some time to read and understand it. Not doing so could cost you very dearly throughout your retirement.

 

A lesson in telling the truth whilst avoiding reality

Workplace Pensions – not a fan!

I have just read an article from the official government www.workplacepensions.gov.uk website titled “Workplace Pension Myth Busters”. I don’t know why I’ve taken so long to read it, but now I have I can’t help feeling “hang on a minute – this is right but…and it’s a big but!

Here is the article word for word written in red. I have added my comments in blue below each section.

Automatic Enrolment into a workplace pension will make it easier for people to start saving for their retirement. By 2018, all employers will have been required to enrol their eligible workers into a workplace pension scheme if they are not already in one.

There is a lot of confusion surrounding pensions and saving. These pension myths can make people feel confused about what they need to do to fund their retirement. We’ve explained some common pension myths below.

It’s not worth saving into a pension

FALSE! Most people can expect to get back more in retirement than they put in their pension. Most people saving into a workplace pension also benefit from contributions from their employer and the government in the form of tax relief*.

*Tax relief means some of your money that would have gone to the government as income tax, goes into your workplace pension instead.

You can’t argue with a statement that says you should expect to get back more from this type of investment than what you put in. But it is by no means guaranteed. The fact that there is currently tax relief and employer contributions are huge pluses. However, I think what most people want from their retirement planning is the reassurance that they can have at least a reasonable standard of living in retirement. The fact that you probably will get back more than will be paid in is a pretty bland statement without any reference to just how much it really is going to take to build up the kind of savings pot that will make a difference to your standard of living.

It’s going to be complicated

FALSE! You do not have to do anything to benefit from a workplace pension – over the coming years, all employees who meet the required criteria will in due course be automatically enrolled into a workplace pension.

Although you as an employee don’t have to do anything to benefit from this scheme, I would be cautious in thinking things are not going to be complicated. I still remember the government making a huge splash with a project called “Pension Simplification” some years ago. It wasn’t simple. It didn’t make things simple. In fact Government’s over many years have tinkered and meddled with pension legislation and we are still far from a system that anyone can have real confidence in. I, however, have every confidence that in a few years time this system will be replaced by the next “great idea” so I wouldn’t rely on this being anything but something you will have to monitor yourself in order to get the best from it.

My house will be my pension pot

BE CAREFUL! Property doesn’t allow you to spread your money across a range of different investments like a pension does, and doesn’t have the same tax advantages.

Your house may well be your pension pot, or it may not. The fact is we don’t know and depending on your circumstances it may be a great idea or the worst idea. A pension does indeed allow you to spread the risk across a range of investments, but if you are on a modest income and benefiting from the minimum contributions that you and your employer can make, then we are talking about spreading things so thinly that even if it was marmite you would still hardly taste it.

I can only pay in a small amount so it isn’t worth it

FALSE! Your contribution to your workplace pension will be a percentage of your salary. You’re also likely to benefit from a contribution from your employer and may get tax relief* from the government too.

*Tax relief means some of your money that would have gone to the government as income tax, goes into your workplace pension instead.

Cliche number one – You only get out of something what you can put in. Cliche number two – A pint of milk costs the same whether you earn £10k a year or £100k a year. If you are getting an employer contribution and tax relief, you might as well take it, but realistically, if you are saving minimums do not expect your standard of living to improve that much just from this scheme.

I’m too old to start saving

FALSE! It is better to start early, but unless your retirement is a few months away, there’s still time for you to build up some money.

You are never too old to start saving. Just understand the obvious fact that even if you are saving £2000 a year in total for the last 5 years of your working life, it still only makes £10,000. Don’t get me wrong, having £10,000 is so much better than not having £10,000 but it’s not enough to affect your lifestyle for the remainder of your life.

The State Pension will be enough

BE CAREFUL! The State Pension is a foundation, but for many people, relying on this alone could mean a fall in income upon retirement. Saving into a workplace pension means people will have more money to continue doing the things that they enjoy when they retire.

This one I agree with! It almost certainly won’t be enough. However, relying on a workplace pension to solve the problem on its own is even more of a risk!

Retirement seems like a long way off – it’s too early to start saving

Although retirement might seem like a long way off, it’s never too early to start saving! Saving through a workplace pension is easy and you don’t actually have to do anything as your employer will enrol you. The earlier you start to save, the more money you will have when you come to retire as your money has time to grow.

Again, I agree completely with this. It is never to early to start saving for retirement. The best way to do it is to save as much as you can afford in a variety of ways and review your savings and situation at least annually. 

As far as workplace pensions are concerned, I am fairly ambivalent. If they are being offered, you would be stupid not to accept what is on offer. What I think is dangerous is the spin that surrounds the scheme which seems to me as if it is giving false hope to millions of employees, especially on below average earnings, that it will provide an income that will be at a level that is completely at odds with reality.

Planning to Avoid a Below Average Retirement Income

I read an article this morning titled:

Women twice as likely as men to be unaware of pension value – Fidelity

You can read the full piece here, but in summary it was saying that some 25% of women do not know the size of their pension pot compared to just 15% of men. It when on to say that 25% of women found the planning process difficult compared with only 16% of men. It did not say whether it was the same 25% that both found it difficult and didn’t know the size of the pot. Students of the science of probability will no doubt bring me up to speed on that. These statistics point toward an increase chance of ending up with a below average retirement income. More worryingly, 21% said they would seek advice on their retirement income from friends and family rather than a qualified practitioner. Getting financial advice from friends and family is a recipe for putting those relationships under some potential strain. If, for no other reason than you can pursue a complaint against a qualified adviser, but there’s no redress against a well meaning cousin, always get an answer to a question or advice on a pension, in writing and from a qualified and regulated practitioner.

Whilst I recognise the disparity between the genders, the fact remains that as a whole too few people are making provision for retirement. When I was actively working in the pension sector, the overwhelming reason that people gave for not putting money aside, was the simple fact that the budget was just not available to do so. There is no simple answer to that problem, although a budgeting technique that many used was to treat their regular pension savings as if it was a bill that had to be paid.

Whilst reading the article, I was reminded of a poem by Robert Frost in which he says

“The afternoon knows what the morning never suspected”. 

Just like the afternoon can’t go back to the morning to change anything, we cannot go back a few years to alter our retirement plans. It is one subject for which the phrase “cannot start too soon” makes absolute sense. But before you can even consider altering plans, you need to find out where you stand now.

                   Today.

                                    This minute.

 

In my previous post “Do You Know Your State Retirement Age” I provided the links for both getting your date of retirement and your State Pension Forecast. Finding out you current situation from private or company schemes takes a little more effort than using the government calculators, but not that much more, and is well worth it in the long run.

Here is a quick four step guide for  finding out where you stand pension wise at this moment.

Step 1

Get a State Pension Forecast using the government calculator

Step 2

If you work for a company that provides pension provision, find the most recent pension statement that you would have been sent. Most would have been sent this time of year. If you haven’t got one, contact your employer and ask for it. They must provide you with one by law. Once you have it, read it. If there is anything, and I mean anything, that you do not understand, write it down and ask them.

Step 3

Write down all the places where you have worked. Some you will know straight away whether or not there was a pension benefit there or not. If there was, have you got a statement from them. If you have moved house, it is quite possible that they do not have your current address. If you haven’t got a statement, or the one you can find is quite old, write to the employer and ask for one.

When you write asking for a statement, address it to the HR department (or equivalent) and mark the envelope “Staff Pension Enquiry”. It is more likely to get to the right person if you do. In the letter you need to include the following:

  • Your Name
  • Your current address
  • Your address at the time you were working there
  • The dates (approximate if necessary) that you worked there
  • Your Date of Birth
  • Your National Insurance Number

Step 4

Once you have got all of these together. Add them up. This should give you a basic idea of the amount you are likely to get. It is probable that the pensions will be of differing styles and the calculation of each maybe slightly different, so it can be safely said that the resulting figure is not going to be exactly accurate, but it will be close enough for you to start thinking about what you might need to do to get the income you want in retirement.

It is at this point that you can decide whether it is worthwhile approaching a IFA for advice on how to make the best of what you have. All IFA’s will initially talk to you for free and will say whether its worth paying for professional advice or not regarding your ongoing planning strategy.

Figures obtained by the Prudential indicate that one person in seven will retire this year without any additional pension other than the state pension. The vast majority of the remainder will experience a shortfall in income from what they are expecting. Regardless of your age or gender, there is no better time than now for starting the planning for your retirement.

Do you know your State Pension Age?

…Or for that matter, how to get your State Pension Forecast?

As with most things in life, a little advanced planning can make things a whole lot easier. Retirement, hopefully, will come to us all and the pro of not doing the 9 to 5 or equivalent, is balanced by con of the major changes in your income. And they are not usually for the better!

The earlier you can start to have an idea of both when you are going to get a State Pension and how much it will be, the better chance you have of making that major change in your life a little easier.

During my lifetime both the date of my retirement and the amount forecast, have changed regularly. It is safe to say that the younger you are, the more chance there is that the rules will change, and change again before you retire. The only way to deal with this is by frequently checking the available forecasts as you go through your working life and as you get closer to that State Retirement date the information can be regarded as being more accurate for you. Fortunately, the government provide a simple instant online calculator for working out your State Retirement age. You can go straight to it by clicking here and then follow the steps below.

Step by Step Guide on how you can find your State Retirement Age





You will notice that along with the Retirement Age, the results page will also ask if you want to follow links for both information about Pension Credit and how to get a State Pension Forecast.  Both are similar in layout to the State Retirement Calculator shown above. As the State Pension Forecast is personal, you will have to log in using your Government Gateway account. You may well use the Government Gateway account for filing your tax return, or perhaps accessing other services. If you do not have one, you can register here.