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.