Financial statementsStatement problems

A recent Which? survey revealed that only 20% of respondents find investment statements very easy to understand. 

Indeed, without a clear understanding of how your pension and investment plans are performing and what retirement income you should expect from your pension, it’s difficult to know whether your savings and investments are working hard enough – and whether you need to take any action.

Terms and jargon

Query anything you don't understand on your statement

Layout and wording can vary from one statement to another. This can mean that useful data gets lost in pages of blurb.

Phrases such as ‘transfer value’ and ‘today’s prices’ are common – but without adequate definitions, they're useless. ‘Transfer value’ means little unless you know that it refers to the value of your pension contributions if you move them to another plan.

‘Today’s prices’ is vague unless you know it is referring to an estimate of what your pension could be worth, taking into account future inflation – this is known as a fund projection.

Rates of growth

Fund projections are included in statements to illustrate how products with a specific target (such as pensions) might grow over time. To do this, the provider makes several assumptions – such as what the average rate of inflation will be between now and the fund’s maturity date. It will also assume that contributions will stay the same and estimate the annual rate of growth.

• Tax-free investments, such as stocks-and-shares-based Isas, assume a typical growth annual growth rate of 5, 7 and 9%
• Taxed investments – unit trusts held outside an Isa, for example – are provided at 4, 6 and 8%
• In the case of pensions, a standardised rate of growth of 7%

However, it may be that your pension or investment to date has grown at a lower rate than the projection. If so, you won’t hit your target and should act to remedy the situation, perhaps by switching your fund or investing more to make up the shortfall.

It’s important to find out how your pension or investment has performed.

Regulation

It would be unfair to blame only fund providers for overlong and confusing statements. The Financial Services Authority (FSA) specifies what information, including an array of data, notes, warnings and assumptions, must be included in financial statements.

If these requirements are resulting in rambling statements, we think that clearer guidance is needed to encourage providers to produce better, easier to understand statements.

Clarity is an issue the industry is addressing. In a recent speech to the Association of British Insurers (ABI), Nausicaa Delfas, Head of Department for Treating Customers Fairly at the FSA, said: ‘The main areas of concern relate to the use of jargon and a lack of explanation of what things actually mean to the policyholder.’

The ABI agreed, telling us: ‘At present, many pensions and investment statements are too long and complicated and, as a result, unclear.’

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