Your annual pension statement may not be the most exciting read, but it’s one of the most important.
Hidden among the charts, projections and small print is a snapshot of how well you are prepared for retirement – and whether anything needs fixing.
From checking whether your contributions and investment growth are on track, to spotting fees or a risk rating that no longer suits your life stage, understanding these things can help you avoid nasty surprises later. Here’s how to decode the key numbers, what healthy green flags look like, and the warning signs that should prompt a closer look.
How much?
Did you get your annual pension statement yet? Scheme trustees are required to send you one at least annually. But it’s one of those emails that hits your inbox, requiring a blizzard of user IDs, passwords and authentication codes to access the contents. Some people don’t bother.
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A pension is how many of us must fund the last quarter of our lives after we have stopped working, so knowing how your pot is tracking is vital, says Tessa Hayes, an employee benefits expert at NFP Ireland.
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Your annual statement will show an opening balance and a closing balance. The first thing to check are your contributions, and those from your employer if you are in a company scheme, are all included.
“Whip out your calculator and make sure the contributions that are deducted on your payslips are reflected in the statement,” says Hayes. “You need to make sure all your contributions have been remitted.”
“Of course you’ll want the closing balance to be more than the opening balance, if it’s less it would definitely need to be queried. But it could be an admin error on the contribution side, or you could have high charges, so it’s important to check,” says Hayes.
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If you are part of your employer’s scheme and they offer to match your contributions, make sure you are maximising this.
Some employers will match your contributions, up to 5 per cent of your income, for example – so if you are putting in 1 per cent, they will put in 1 per cent, but that means there’s an additional 4 per cent you could be getting that you are leaving on the table.
“If you can afford to push it up a bit, to 3 or 4 per cent even, yes it’s a little bit extra every month out of your payslip, but are benefiting from tax relief on that and you are also maximising what you can get from your employer,” says Hayes.
“It’s essentially free money – it means you are making the most of your remuneration package.”
Charges
Are you paying too much in charges? If you don’t review your annual pension statement, you’ll never know.
Most benefit statements list something called an “annual management charge” or AMC – that’s how much you are paying a fund manager to manage your pension investments.
There can be a significant variation on this between pensions – from 0.75 per cent, for example, up to 1.2 or 1.5 per cent.
“Anything higher than 1.5 per cent would be something to query,” says Hayes. “If you are being charged a high amount and you don’t feel you are getting a good service, query it with the provider.”
Teresa Bruen, financial planning consultant at Gallagher, has seen charges of up to 1.75 per cent.
“You would really want to be coming in at 1 or 1.25 per cent – that would be standard to cover a pension adviser fee,” says Bruen.
Those who are part of a company group scheme will likely be paying much less, she says.
“If you are paying anything above 1.25 per cent a year, particularly as your pot grows, that’s really going to eat into the growth and its potential as the years go on, so that would definitely need a review.”
Risky business
Are you an overly cautious “1″ or are you taking a walk on the wild side at a “7″? Your pension statement will represent your risk rating, or “investment strategy”, as a number. This can range from a scale of “1″ which equates to “very low risk”, up to “4″, which is “medium risk”, right up to “7″, which is “very high risk”.
A pension with a risk rating of “6″, for example, might mean your contributions are invested mostly in higher-risk/higher-reward items such as equities, rather than less-risky bonds or cash.
When it comes to gauging if you are taking the right amount of risk, age is the starting point, says Hayes. If you are in your employer’s scheme and on that pension provider’s “default” investment strategy, the fund manager will de-risk you the closer you get to retirement, she says. This can happen from about 15 years out from retirement, so at around age 50.
“When you are in your 30s and 40s, though, you want to stay in those high-growth assets which are higher risk, so you want a good equity content there. The majority of multi-asset funds would be well diversified and would carry a good mix of asset allocations,” says Hayes.
“If you are 40, and plan to retire at 65, that’s 25 years’ growth, so you don’t want to jump the gun early, so you stay in the high-growth phase,” says Hayes. “You’d be staying up at your ‘5′ or ‘6’.”
If you are more than 15 years out from retirement, you have more time to take investment risks that can pay off, and for your pot to recover if they don’t.
Younger people are going to have 70 per cent of their pensions in stocks, but those in their 50s might veer more towards the bond market, keeping up with inflation, says Bruen.
If you’re approaching 50, it’s time for a chat with your fund manager, she says.
“Some people aged 50 come into us and say, I want the highest-risk fund – that’s fine, but how do you actually feel about risk – does it give you the heebee jeebees? Then you probably shouldn’t really be in a high-risk fund,” says Hayes.
Your choice is usually tempered by when you plan to retire and your temperament.
“You might have someone who is 35 and is planning to retire at 50, so when you hit 40, we probably should look at reducing volatility,” says Hayes.
“If you are going to retire at 65, once you hit 50 or 55, you would gradually start to reduce volatility and move away from those high-growth assets and bring in bits of cash, bonds and less-volatile funds,” she says.
“If you are not in a default fund that doesn’t automatically do all of this for you, it’s really important that you are engaged with your adviser and keeping an eye on it because those decisions will be up to you to make and won’t be done for you.”
If you are in your 50s and you started a pension late, you haven’t contributed enough, or your pot isn’t as big as it should be, you have some choices, says Bruen.
“I have 50 year-olds in and we discuss risk and gauge their risk tolerance, if they go with a ‘2’ or ‘3’ risk, they are going to have a huge shortfall in retirement, so they have two options: they can either work longer, or try to take more risk, but with that they could end up with less. But they will never have the chance of making up the difference if they stay at the lower risk. For some people, it can make sense to take higher risk in their 50s,” says Bruen.
“Ask yourself, if there was a market correction, and it badly affected your pot, are you okay with working a few extra years until your pension comes back,” says Bruen.
Reviewing your annual statement and discussing it with your fund manager can be a pleasant surprise for some.
“If you get to that point in your 50s where your pension has given you the tax-free lump sum you want and the income you want in retirement, then you’ve done enough,” says Bruen.
Projected fund value
As well as an opening and closing balance for the year, your pension statement or pension portal is likely to show you your “projected fund value”.
Whatever the figure, know that it’s not a promise.
“We think of it more as a range than an outcome,” says Tessa Hayes. “It’s not guaranteed. Yes, comparing this figure year on year can be useful, but it does not confirm what you will actually get in retirement.”
Your projected fund value figure can give you a sense of whether things are on track, however.
“We don’t have a crystal ball – the market in the past year has been volatile and there will always be ups and downs. We don’t know what the markets will be in 20 years’ time, so it’s just a guide. It’s something based on standard assumptions and it considers future returns,” says Hayes.
Don’t make the mistake of thinking your State pension will be in addition to the projected fund value figure – most pension providers include this in their figures.
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But how much should your end pot be actually worth?
“We would like to aim for about 70 per cent of your income, that would be ideal in retirement,” says Hayes.
Everyone’s expectations and lifestyle are different, however. If you are earning €50,000 a year, for example, the State pension will amount to about 30 per cent of that, so there would be a big gap there, she says.
Achieving 50 per cent of their income can be fine for some in retirement, she says.
“You want to make sure you have all the money to do the things you want to do. We are all living longer. Before, you might have needed a pension for ten or 15 years, now it can be for a quarter of your life, so it’s important you have enough to sustain you,” she says.
Maximising any employer contributions, and all the tax relief available to you, can make a big difference to your pot.
“Making use of every opportunity at every pay-day is really key,” says Hayes.
Allocation
Are all of your contributions going into your pension? The “allocation” figure, or “allocation rate”, refers to the percentage of your contribution that is actually invested into your pension fund. The remaining percentage is a fee charged by the pension provider, often called an “entry fee” or “entry charge”.
Most providers offer 100 per cent allocation, which means 100 per cent of your contributions hit your pension pot.
“Some people are on allocations of only 95 per cent and they don’t realise it,” says Bruen. “So every €100 they put in, they are already down €5, or 5 per cent, so their pension has to work 5 per cent harder before it starts actually making a return for them,” she says.
That’s an important thing to check rather than focusing solely on performance, says Bruen.
If the allocation is not what you expected, this can flag that it’s not the right product for you, she says.
Legacy pensions
How many of us have inactive pensions from previous jobs?
These older plans can have higher charges and if they are sitting with an older employer, you may not really have much say in the investment strategy, says Hayes.
The first step is to track down any old pensions from previous jobs, you can do this by contacting that company’s HR department. If you hit a dead end, you can contact the Pensions Authority – they don’t hold details of individual entitlements, but they can help identify the administrator or trustees of a specific scheme.
If you have a few old pensions, it’s worth talking to a pension adviser about whether it’s a good idea to transfer one of them to your current work pension, or not. By doing so, you might be giving up earlier access to that pot – some old schemes you can access from age 50, for example.
At a minimum, track down pensions and get a pension statement, and update them on your address and beneficiaries, says Hayes.
“You’d be surprised at the amount of legacy pensions people have no idea they have. It might not be a lot of money, but it can bolster up your pot in the end.”
