One of the key documents that connects defined contribution pension savers with their pension is their annual statement. As the name suggests, defined contribution pensions have a fixed contribution – usually a percentage of pay – but the pension you get at the end isn’t guaranteed. Instead, you build up a pot of money from which you can take a regular income or lump sum when you retire. It’s up to you when you access your savings, but you can’t do so until you reach age 55.
Annual statements for defined contribution pensions are mandatory, so if you don’t receive one, it may be because you have changed address. Make sure your previous pension schemes and pension providers have your up-to-date contact details.
Defined benefit pension schemes aren’t required to issue annual statements, but you do have the right to ask for one, regardless of whether you are still building up benefits. If you don’t have a recent value for the pension that will be paid out at retirement, write to the pension scheme administrator and ask for one. They must supply one within two months of your request.
Defined contribution pensions: what the annual statement tells you
Defined contribution pensions are known by a number of names – the most common are ‘personal pensions’, ‘group personal pensions’, ‘stakeholder pensions’, ‘group money purchase pensions’ and ‘executive pensions’.
Your annual statement will contain valuable information such as:
- The amounts paid in over the last year by you, your employer and by the government in the form of tax relief.
- The value of your pension pot at the start and end of the statement year.
- Charges deducted.
- The fund(s) your money is invested in.
The statement also includes a projection of what you might get back at retirement. Consider this projection as a rough guess rather than an accurate expectation of what you will actually receive. No one knows what future investment returns will be, as they depend on a huge number of different economic factors.
As you approach retirement, the projection will become a more reliable indication of what you will actually get. But, even then, there’s room for it to change markedly – particularly if your pension is invested in more volatile higher risk funds.
How you might use the information in your annual statement
Firstly, you should use it to judge whether you are on track to receive the amount of pension you want at retirement. The current value of all your pensions, including the state pension, can be input into retirement planning tools to estimate what you will get back at retirement in total. Take a look at Aviva’s Retirement Planner tool to see how this works in practice.
Tools like this also make assumptions about future investment returns. Like the projected values on annual statements, they should also be regarded as a rough guess of what you will get back at retirement. But if you review your pension annually and review the amount you pay in, you are much more likely to reach your desired amount of pension by retirement.
The second thing you should use your annual statement for is to review the amount you are being charged by your pension provider. Are you paying too much? Should you transfer to a more modern lower cost pension? These questions don’t necessarily have straightforward answers – you should consider contacting a financial adviser if you’re unsure what your best course of action would be. It’s also well worth reading the August 2016 issue of Thinking Ahead, looking at which pensions you might consolidate and why. If you do choose to transfer your pension, your investments may go down as well as up and you may get back less than the amount paid in. If you do take financial advice, be aware that a fee will be charged for this service.
Whatever you do, don’t opt out of your current employer’s scheme just because you think the charges are too high. The value of your employer’s contribution usually far outweighs any higher charges.
The final thing you should use your annual statement for is reviewing your investments. You may want to ask yourself:
- What fund is your pension invested in?
- How has it performed this year, and over the last few years relative to similar funds?
- How volatile is the fund and does it smooth out the ups and downs of the investment markets?
- Are you taking too little or too much risk?
- What are the charges for this fund and could you find a cheaper one that would deliver similar performance?
And, of course, you should always bear in mind that the value of investments can go down as well as up, and you might not get back what was paid in.
Why wait a year to get information about your pension?
Many pension providers now offer online accounts where you can review the value of your pension and the performance of investments whenever it suits you and in real time.