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5 steps to understanding your pension

Having lots of pension pots all with different rules can be confusing. This five-step plan could help you understand your pension and make life easier.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Pensions have changed radically over the years. Today, there's a myriad of different types and some are easier to get your head around than others.

To avoid unnecessary stress, make sure you understand what your pension is and how it works now. Not only could it save you a headache later, but you can learn how to take advantage of your pension's rules. This will make retirement planning so much easier and, you never know, you might find out you can retire earlier than you thought.

We hope you find these 5 steps helpful, but please remember this article isn't personal advice. If you're not sure what's best for your circumstances, ask for financial advice.

Step 1 – get details of your current pensions

Assuming you pick up a new pension with every new employer, you could end up with a hodgepodge of different pension pots, all with their own set of rules and benefits.

You might have received a lot of paperwork over the years, so have a look through and see if you can find any pension statements, retirement projections or investment valuations.

If you haven't had any documents or they stop after a certain date don't worry, there might be a valid reason. For example, you might have signed up to receive your statements online or, if you've moved address, you might have forgotten to tell your pension providers. Even if you have a company pension, don't assume your employer will communicate this for you.

The best thing to do is to log in and see what your pension is worth and check your details are up to date. If you don't know your login details or haven't set them up yet, try your pension provider's website or contact them directly.

If you can't find any information on your pension and aren't sure which company it's with, try the pension tracing service.


Step 2 – find out what type of pension you have

Your pension scheme booklet or key features document should give you the full picture. But you could also take a look through your paperwork or online statements to see if your pension type matches any of the below.

We've briefly summarised how each works to give you a starting point. Lots of these types of pension will be invested in the stock market, meaning you could get back less than you put in as investments go up and down in value.

  • Personal pensions – an individual pension pot earmarked for you. You choose the provider and make arrangements for your contributions to be paid.
  • Stakeholder pensions – like a personal pension but with certain minimum standards designed to make it low-cost and easy to run.
  • Self-Invested Personal Pensions (SIPPs) – a type of personal pension that gives you more control and typically a wider range of investment options.
  • Defined Benefit (DB) pensions – will pay you a guaranteed income until you die. The amount you'll get will depend on how many years you've been a member of the scheme, your salary and the rules of the scheme.
  • Additional Voluntary Contribution plans (AVCs) – a pension that you pay into alongside another workplace pension like a DB scheme.
  • Retirement Annuity Contracts (RACs) – these were individual contracts which were aimed primarily at the self-employed. They were replaced by personal pensions. They might have a guaranteed annuity rate that's likely to be better than the rates available today.
  • Executive Pension Plans (EPPs) – often set up by smaller companies for directors and senior employees.
  • Occupational money purchase pensions – a workplace pension where all the money from the scheme is pooled together and invested in line with the overall objectives of the pension fund. Although each member will have funds ‘notionally earmarked' for them.
  • Old protected-rights pensions – normally a personal or stakeholder pension built up if you contracted out of paying into the State Second Pension or State Earnings Related Pension (SERPS).

Step 3 – see if your pension has any guarantees

Some pensions come with valuable guarantees on the amount of income or tax-free cash you'll get. A guaranteed income is particularly valuable as your income will be paid as long as you live, and you won't have to worry about the ups and downs of the stock market. Lots of these guarantees could even mean you'll get a higher rate of income or tax-free cash.

To see if your pension has any guarantees, check your pension scheme booklet or key features document. Common guarantees and benefits to look out for:

  • DB pensions – like final salary or career average schemes
  • Guaranteed annuity rates
  • Guaranteed minimum pension
  • Protected tax-free cash

Make sure you get to grips with any guarantees you have. Getting an idea about the kind of income and/or tax-free cash you could expect will help when planning for the future. Remember tax rules can change, and benefits will depend on your circumstances.

Step 4 – check if your pension is invested in the stock market

One in three people we asked didn't know whether their pension was invested in the stock market.

Most pensions are invested because the aim is to grow the money paid into them over time. Of course, growth isn't guaranteed and there's always the risk that you could get back less than you put in.

You should take the time to learn about where your pension is invested. Check online or look for your pension fund factsheet or Key Investor Information. This will show you the charges you're paying and how the investments have performed over time. Ask your provider if you're not sure.

Think about whether you're happy with your current pension investments. You'll need to consider the charges and whether the aims of the investments line up to your own goals and attitude to risk.

Step 5 – think about consolidating your pensions

As a rule, it's best to leave any pensions with guarantees where they are. If you did want to transfer, it's likely that you'll need to get advice from a regulated financial advisor. You'll likely lose these benefits if you move the pension to another provider.

The same also applies to AVCs that are linked to DB schemes. If you transfer the linked AVC, you'll lose any ability to pay the tax-free cash in relation to the DB scheme from the AVC funds. This means you could get less overall guaranteed income from the DB part. That's because tax-free cash for a DB scheme is normally otherwise generated by reducing the pension income available.

For anything else, it's worth thinking about bringing your pensions under one roof.

Transferring old workplace or private pensions and combining them into one pot could make your life simpler moving forward. You'll only have one set of rules and login details to remember. With everything in one place you'll also have better clarity on how much your pension is worth, and control over where it's invested.

Most pensions will give you a selection of investment options, but these can be restricted. For a wide range of options, you could consider the HL Self-Invested Personal Pension (SIPP).

Before transferring a pension, make sure you won't lose any benefits or guarantees. You'll be out of the market if your pension is transferred as cash, meaning you won't benefit from any rises or suffer any falls while the transfer takes place.

As well as checking for benefits and guarantees before transferring, you should also look for high exit fees and compare the services and charges of both providers.

See our guide to transferring a pension

Transfer to the HL SIPP for simplicity

If you're planning on consolidating your old pension pots, it's worth considering transferring them to the HL SIPP. It's a pension that's simple to understand and easy to manage.

  • See the value of your pension 24/7 online or with the HL app
  • Choose from a wide range of investments to match your goals and values.
  • Feel more confident about your financial future with our help and support.


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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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