How Do I Understand My Pension Statement?

First: make sure you're reading the right kind of statement

Before interpreting the numbers, establish what type of pension you've got.

If it's a defined contribution pension, you're normally looking at an invested pension pot.

If it's defined benefit, such as a final salary or career-average scheme, the statement works differently because the important information relates primarily to the benefits promised under the scheme rules.

If you're not sure which one you're holding, stop here and read:

What Type of Pension Do I Have?

For the rest of this guide, we're concentrating mainly on defined contribution pensions.

1. What is my pension worth today?

Look for:

• Current value
• Fund value
• Plan value
• or something similar.

This is broadly the value of your pension at the date shown on the statement.

For example:

Pension value: £86,420

That tells us something useful.

But it doesn't tell us everything.

We don't yet know:

• how much you've paid in;
• how much an employer has paid;
• whether tax relief has been added;
• whether money was transferred in;
• how the investments performed;
• or what charges have been deducted.

Steve's observation

People often look at their pension and ask:

"Has it gone up?"

I normally want to know:

"Why has it gone up?"

If you put £8,000 into it during the year and the value increased by £8,500, that tells a rather different story from the investments themselves producing £8,500 of growth.

Same final number.

Different story.

2. How much money has actually gone in?

Your statement may show contributions from several sources.

Depending on the pension, these might include:

• Your contributions
• Employer contributions
• Tax relief
• Transfers from another pension

Don't lump all of those together as investment performance.

Suppose the pension started the year at:

£80,000

and finished at:

£90,000.

It would be tempting to think:

"Brilliant — I've made £10,000."

But if £8,000 was contributed during the year, that's obviously not what happened.

This is why contribution information matters.

Current pension-statement guidance requires relevant DC annual benefit statements to show contributions credited during the statement period, while statements commonly show transfers and other money added as well.

3. How have my investments performed?

Now we're getting to the part people usually care about.

Your pension may show:

investment gain

or:

investment loss

during the period.

Alternatively, you may need to look at the performance of the individual fund or funds in which the pension is invested.

But be careful.

One year's performance doesn't tell you whether a pension is good or bad.

A fund taking relatively high investment risk could have a brilliant year followed by a terrible one.

A lower-risk investment might behave completely differently.

And two funds designed to do different jobs shouldn't necessarily be compared against one another simply because both happen to contain your pension money.

4. Where is my pension invested?

Look for sections headed something like:

• Investment funds
• Fund allocation
• Investment choice
• or: Where your pension is invested

You might see one fund.

You might see several.

And occasionally you might discover something particularly revealing:

you've had a pension for 15 years and didn't know where it was invested at all.

That's more common than you might think.

The fund name alone won't necessarily tell you whether the investment is appropriate for you.

But identifying it is the first step.

If you have a workplace pension, we've already covered this in:

Where Is My Workplace Pension Invested?

Foundation 3 will broaden the subject across personal pensions in:

What Is My Pension Invested In?

For now, write down the fund names.

5. What charges am I paying?

Your statement may show some of the charges deducted from your pension.

Depending on the arrangement, these might include things such as:

• annual management charges;
• fund charges;
• policy or platform charges;
• administration charges;
• transaction costs;
• advice charges where applicable;
• or other scheme-specific costs.

Charges matter because money leaving your pension in costs is money that isn't available to compound for your future.

But don't make the opposite mistake and assume:

cheapest pension = best pension.

Features, investment choice, service and valuable guarantees can matter too.

MoneyHelper also warns that moving to reduce charges can sometimes mean losing valuable benefits, including certain guaranteed retirement income features or protected pension ages.

So:

understand the charge before deciding whether it's expensive.

We've already introduced this in:

What Charges Am I Paying on My Workplace Pension?

and we'll deal with personal pension charges properly in:

How Much Am I Paying in Pension Charges?

6. What retirement age is showing?

Look for:

• Selected retirement age
• Selected retirement date
• Normal pension age
• or similar wording.

This can be surprisingly important.

Why?

Because the retirement projection shown on your statement may be calculated using that age.

If your pension statement assumes you're retiring at 67 but you're actually planning to stop at 60, the projection isn't answering your question.

It's answering a different one.

Steve's observation

Sometimes the pension projection isn't wrong.

It's just answering a question you didn't realise you'd asked.

If the provider thinks you're retiring at 67 and you're mentally packing your desk at 60, we probably need to update the plan.

7. What does the projected pension value mean?

This is one of the most misunderstood parts of a pension statement.

You might see something such as:

Estimated pension at retirement

or:

Projected retirement income.

That figure is not a promise.

For defined contribution pensions, the eventual outcome can depend on things including:

• future contributions;
• investment performance;
• charges;
• when benefits are taken;
• and how the pension is eventually accessed.

Providers therefore have to make assumptions to produce an illustration.

Your actual pension could be higher.

It could also be lower.

MoneyHelper specifically warns that defined contribution pension values can continue rising and falling until benefits are taken and that actual outcomes can differ from provider estimates.

8. What about the estimated retirement income?

Some pension statements translate the projected pot into an estimated retirement income.

Again, read carefully.

The illustration may use a particular method of converting the pension into income.

MoneyHelper notes that DC provider estimates are commonly based on converting pension money into guaranteed income at the scheme's normal pension age, so the actual outcome could be different if you retire at another age or use another retirement-income method.

That matters enormously.

Because when you eventually retire you might consider:

• pension drawdown;
• an annuity;
• lump sums;
• a combination;
• or another available option.

We've already built the detailed retirement guides:

What Is Pension Drawdown and How Does It Work?

What Is an Annuity and How Does It Work?

Pension Drawdown or Annuity: Which Is Better?

So don't mistake the income illustration on a statement for your retirement plan.

9. Does the statement show a transfer value?

It may.

For a straightforward defined contribution pension, the transfer value may be similar to the current fund value, although scheme terms and circumstances matter.

Defined benefit arrangements are different.

A defined benefit pension may have a Cash Equivalent Transfer Value — CETV.

That figure represents something very different from simply having an equivalent-sized defined contribution pension pot.

If you see:

CETV

do not mentally translate that into:

"I've got £300,000."

You have a set of defined benefits and have been given a value associated with transferring those benefits elsewhere.

That's an important distinction.

We'll cover transfers properly later in Foundation 3.

10. Are my personal details correct?

This sounds painfully boring.

Check them anyway.

Look at:

• your name;
• address;
• date of birth;
• contact details;
• selected retirement date;
• marital or beneficiary information where relevant.

MoneyHelper specifically recommends checking that pension providers hold correct contact details, because incorrect information can create problems when providers need to contact members.

Thirty years is quite a long time to expect a pension company to know you've moved house unless somebody tells them.

11. Who gets my pension if I die?

Your statement or online pension account may refer to:

• beneficiary nomination
• expression of wish
• or similar wording.

Check it.

Particularly after:

• marriage;
• divorce;
• separation;
• bereavement;
• children;
• a new relationship;
• or other major family changes.

The exact treatment of pension death benefits depends on the pension and the rules applying at the time, so this isn't something to assume from an old form completed twenty years ago.

Don't read one pension statement in isolation

If you've got four pensions, reading one statement beautifully doesn't give you a retirement plan.

We ultimately need to know:

• Pension 1 — value and type
• Pension 2 — value and type
• Pension 3 — benefits
• Pension 4 — value

plus:

• State Pension
• other savings and investments

and:

the retirement you're actually trying to pay for.

That's when pension statements stop being paperwork and start becoming useful planning information.

The 10-Minute Pension Statement Check

Once a year, or whenever you receive a new statement, ask:

1. Is the personal information correct?
2. What is the pension worth?
3. How much went in?
4. Who paid it — me, employer, tax relief or transfers?
5. Where is it invested?
6. How did those investments perform?
7. What charges can I identify?
8. What retirement age is being assumed?
9. What retirement income is being illustrated?
10. Has anything important changed?

That's already considerably more useful than:

"It's gone up. Excellent."

Close drawer.

See you next year.

What Should I Do Next?

Find your latest statement.

Don't just read it.

Translate it.

Write down:

• Current value
• Contributions this year
• Investment funds
• Charges
• Retirement age
• Projected retirement value/income
• Any guarantees or special benefits mentioned

Then repeat the exercise for every pension you have.

If one is missing entirely, that's our next job:

How Do I Find All My Pensions?

Your pension statement isn't your retirement plan.

It's a piece of evidence.

It tells us what you've accumulated, what's happening to it and what the provider currently illustrates might happen in future.

The useful bit starts when we combine that information with: all your other pensions, your State Pension, your savings and investments, and most importantly: the life you actually want to live when you stop working.

Steve's observation

The biggest number on your pension statement is rarely the only number that matters.

Sometimes the little boring numbers around it tell us considerably more.

And once you understand those, pension statements stop looking quite so much like financial hieroglyphics.

Got three pension statements and absolutely no idea whether they're telling you good news or bad news? Start by translating each one into the same simple information: value, contributions, investments, charges and retirement assumptions. If you'd like help understanding what your pensions are actually telling you and how they fit into your retirement plans, speak to Open Door Wealth.