INSIGHT: Make The Most Of Your Annual Pension Statement
How Much Money Do I Need In Retirement and Is My Pension Enough?
Final Salary, a guaranteed retirement income, pensionable salary scheme, and golden handshake for the golden years – these seem like phrases from a long gone past with the demise of the final salary workplace pension and we now find ourselves in a time of money purchase pensions - both work placed group pension plans including auto enrolment schemes and personal pensions.
Having worked in financial services for twenty years (mainly in pensions), the question clients ask me the most are ‘how much do I need to invest in a pension and what income will this provide me with in retirement?'
Obviously many factors come into play when answering such as; how long until your retirement, what level of investment risk and capacity for loss are you willing to sustain, what can you afford, the level of State pension you are entitled to and ultimately what capital/income do you need in retirement?
In order to work out the best answer you really need to sit down with an Independent Financial Adviser and complete what the industry calls a ‘fact find’. The ultimate aim here is gaining an overview of your current financial situation and establishing your needs in retirement.
Let’s fast forward to a completed fact find having established all the above factors. How do we know your retirement planning is on track? After all, we don’t have a crystal ball knowing exactly what the returns will be on your investments, the amount of capital you contribute (which may vary as your circumstance may change over the years) and which method of drawing your capital at retirement is most suitable, the answer is your yearly statement.
Your Yearly Pension Statement
This is the one you receive annually that has lots of information that you don’t quite understand and is filed away each year in the kitchen drawer.
Now, I’m not saying that client’s don’t understand the content of the statement, but my experience tells me most don’t, not through ignorance, but from the lack of explanation given by the pension provider. Maybe this is the pension industry’s fault or that of the regulator, but that is a debate for another day.
The statement or Statutory Money Purchase Illustrations (SMPIs) is a yearly illustration of the estimated pension a member might get when they retire at today’s prices in real terms. The foundations of the SMPLs are based on assumptions:
In today’s prices, this means it is adjusted to allow for the effect inflation has on the cost of living over the period before the client retires and in turn, how far their money will go in the future, assuming inflation at 2.5% per annum.
‘Assumed Growth Rate’- this will consist of up to three projections at different growth rates, a lower rate, an intermediate rate and a high rate. This is the assumed return you may achieve each year on the investment - bear in mind these figures have inflation taken into consideration.
The level of income- the SMPI states what income you may get and again is based on assumptions. It assumes you purchase an annuity (income for life) and the annuity rate again takes inflation into consideration. This may not be the preferred method a taking pension income but again it is assuming that you are.
In summary your statement gives you an indication of what capital/income you may get on your selected retirement date. Various assumptions are taken into consideration such as growth rates and annuity rates, with the effects inflation may have on the spending power of your future capital/income, but into today’s prices.
Nothing is guaranteed and the SMPIs are just a guide, albeit a very useful one.
So if you just open your annual statement but don’t really know what to do with it don’t just file it away, your retirement is a time to enjoy the fruits of your labour and like all things in life needs careful planning.
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Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.
This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.