Anyone else baffled by pensions statements? They come annually and are full of all sorts of technical terminology and confusing jargon including projections that are made difficult to understand. It’s enough to make your head spin! So we approached Holly MacKay of Boring Money to help us get our heads around the issue;
Pension statements are long-winded and contain an awful lot of waffle that you aren’t very likely to read. However, there are a few key things you need to note.
First, the value. How much have you got and how much it is likely to get you as an income each year when you retire? Take note of this! If it’s not enough, you need to try and work out how to save a little more each year. The figures should use reasonable growth rates bearing in mind the types of assets you are invested in and make it clear what your pension might be worth in today’s money. It will also give you what is called a transfer value – the amount you would get if you wanted to transfer it into another pension (net of any charges or deductions).
Check out the fees – excluding any adviser fees you really shouldn’t be paying more than 1% – 1.25% a year all-in for a pension.
Then, it will probably also tell you the type of pension – defined contribution or defined benefit. Defined benefit schemes give you a guaranteed pension increasing with statutory levels of inflation for life. The amount is calculated on the length of service and your earnings while you were a member of the scheme. Few are based on final salary now with most being hybrid and having a money purchase element or are career averaged earnings. These are increasingly rare and I’m quite jealous I haven’t got one! Defined contribution schemes are where you make regular contributions throughout your working life and you just get what you get at the end. One is fixed, the other is variable. Most pensions today are defined contribution.
Your statement will also tell you whether your pension comes with any bells and whistles. These can be valuable and might include things like a guaranteed annuity rate, or they can be bad, such as an early exit fee. As a rule of thumb, if you see the word ‘guarantee’ anywhere, consider talking to a financial adviser before trading it in. These things can be valuable! Annual Statements can be pretty useless for this and if people want to know about bells and whistles they should check their policy terms and conditions or request a transfer pack for info-only purposes.
Finally they will tell you what your money is invested in. How spicy is the stuff your pension savings are sitting in. Risk is not necessarily a bad thing here. If you are 40, for example, and this pension has years to tick over before you need it or can access it, sitting in ‘safe’ cash can sometimes be the worst idea! Most pensions will put you in what they call a ‘default fund’ which isn’t as miserable as it sounds – it’s what the boffins think is the most sensible option for your age and the number of years left until you retire.