Plans to give pension savers more realistic idea of potential returns will see thousands shaved off predicted retirement pots
Pension savers will see thousands of pounds shaved off their predicted future retirement pots from 2014 under the City regulator’s plans to give them a more realistic idea of potential returns.
The Financial Services Authority (FSA) said it will reduce the standard projection rates used to show possible future returns and the impact of charges for someone taking out a product such as a personal pension or a life policy.
It said the move will reduce the possibility of consumers being given a “false impression” of the size of their potential cash pots.
Firms will have a year to implement the new projection rates, which come into force in April 2014.
Under the current system, firms are required to use projection rates to show what returns an investor might receive, which are not a firm guarantee but give a flavour of what people might gain from their investment.
They are meant to give three different rates of return and revise them down if a product appears unlikely to achieve this.
But the FSA has been consulting on plans to strengthen these rules after finding that providers often fail to comply with this requirement.
Under the current system, a pension statement shows what a pension will be worth if it grows by 5%, 7% and 9%.
But the FSA said the projection rates will be cut to 2%, 5% and 8% to make sure customers are not given potentially misleading or exaggerated information.
The changes could lead to people re-considering their plans for retirement. At present, a 22-year-old earning £30,000 a year who contributes just under £2,000 annually to their pension is told that their projected pension income would be around £10,300 on retirement at 68, based on a mid-point growth rate of 7%.
But under the new mid-point growth rate of 5%, the projected income would be thousands of pounds less, at around £6,400, according to research from financial services provider Hargreaves Lansdown.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “It is important to remember that these are just projections; they will have no impact on what investors actually get back from their savings.
“The one thing we can guarantee is that whatever projection rates are used, they will be wrong, simply because they are only projections – reality will be different.”
He said it is vital that investors do not just look at a projection once and then forget about it for the next 30 years.
McPhail said: “Every year they should look at their investment, at how it has performed, how much they are investing and what it might grow to.
“By doing this they are more likely to avoid nasty surprises when they come to cash in their investment.”
The FSA’s consultation follows a PwC report which suggested lower rates of return.
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