How to Read a Pension StatementEasy

One page, two entirely different machines. What the number means depends on whether somebody promised you an income or handed you a pot.

4 min read · 807 words

Read it in this order

• Establish which machine you are in first. A statement from a scheme that promised you an income and one from a pot in your name look similar and mean different things — how a pension actually works is the page on that difference.
• The order that works: which kind → what went in → what is deducted → what the projection assumed → what the income would cost.
• This page explains a document. It is not advice about your own arrangements, and no number here can be read as a promise.

1. Which kind of scheme

• A promise states a benefit at a retirement age, usually derived from service and salary. The investment outcome is the scheme's problem; the useful question is whether the scheme can meet it.
• A pot states a balance. Nobody has promised a number, and everything on the rest of the statement is about how that balance got there and where it might go.
• Many people have both, from different employers, and comparing the two totals as if they were the same unit is the first mistake.

2. On a promise: the funding position

• The funding level compares assets to the value put on the promises. It moves with long interest rates as much as with markets, because the liability is discounted like a long bond.
• The valuation date matters more than usual. These figures are typically produced on a cycle rather than continuously, so the number is a snapshot with a date on it.
• The employer covenant — the sponsor's ability to make up a shortfall — is part of the security and is rarely quantified in a member statement.
• Inflation. How the benefit increases before and after it starts is written into the rules, often with a cap. Two schemes with the same headline benefit can differ enormously over thirty years on that one clause.

3. On a pot: what went in and what came out

• Contributions are split between yours, the employer's and any tax relief. The employer's share is the one that never appears on a payslip as income and is easiest to overlook.
• Charges are deducted from the balance, which means they compound in the same direction as the returns. Costs and fees works the arithmetic through.
• There is usually more than one charge. A charge on the pot, a charge inside each fund, and sometimes a charge per contribution. They are disclosed in different places and rarely added up for you.
• Transaction costs inside the funds sit outside the headline figure, as they do on a fund factsheet.

4. The projection, and what it assumed

• A projection is a model, not a forecast. Its assumptions — a growth rate, an inflation rate, a charge, a retirement age, a contribution that continues — are stated somewhere on the document and decide the answer entirely.
• In today's money or not. A figure that has been deflated to today's purchasing power and one that has not can differ by a factor over thirty years, and both are honest labels for very different numbers.
• Change one assumption at a time. The compound growth calculator shows what a single percentage point does over the same period, which is usually more informative than the projection itself.

5. What the pot has to become

• A balance is not an income. Turning one into the other means either buying a promise — an annuity — or drawing from the pot and keeping the risk.
• The two move together and not in your favour. When long rates fall, the pot may rise and the income it buys gets dearer at the same time; the statement shows the first half of that and rarely the second.
• The order of returns starts to matter once withdrawals begin, in a way it never did while contributions were going in.

6. The administrative half nobody reads

• The expression of wish or nomination says who receives the pot if you die before it is spent. It is on the statement, it is usually out of date, and it is the one field on the page nobody else can correct.
• The retirement age recorded drives the projection and the default investment path, and it is often the scheme's default rather than anything you chose.
• The default fund is where most balances sit. That is a fact about defaults rather than a statement about the fund.

What is missing on purpose

• Everything held elsewhere. A statement describes one arrangement, so the total is only ever assembled by the person holding all of them.
• What the income will actually be. That depends on a price, at a date, for a promise nobody has quoted yet.
• Whether the assumptions are reasonable. They are stated and not defended, which is why reading them is the whole exercise.