Estimates of retirement fund values to be cut in 2014


Providers of tax-advantaged products, like personal pensions, give people taking out a product an indication of possible future returns based on their pension fund growing by five, seven and nine per cent, after taking into account the impact of charges.

The Financial Services Authority (FSA) sets the projection rates, which are used to estimate how much your pension pot could be worth when you retire.

Changes are being made after an independent review of the projection rates that the FSA requires firms to use. After 6 April 2014, your pension statement will have to show the value of your fund and what it would be worth at your retirement date if it grows by two, five or eight per cent.

This is believed to be more realistic than the higher projected rates now being used. This change does not reduce the actual value of your savings or how your investment performs but needed to be lower to give customers a more realistic picture – to avoid consumers ‘being given a false impression’ about the investment returns they could expect to receive.

This could mean a shock for personal pension holders when they open their annual statements in 2014, as thousands of pounds of notional returns will be wiped off. For example, someone in their 20s who earns £30,000 and saves £2,000 a year into a workplace pension can currently expect to have a retirement pot when they reach 68 of £540,000. But under the new 5% growth rate projection that firms will have to use, this figure will be just £335,000. The change means that the person’s predicted pension income will fall from £10,400 a year to £6,430 a year – a drop of 38 per cent. As well as pensions, the new rules will also cover the expected growth of financial products including ISAs and endowments.

The FSA has given firms a year to implement the new projection rates. It has also published new rules requiring Self-Invested Personal Pensions (SIPPs) operators to provide Key Features Illustrations to consumers to show how charges on their savings will impact upon their future return.
Joanne Segars, Chief Executive of the National Association of Pension Funds (NAPF), said: ‘Pension holders should give their savings a ‘regular MOT’ to manage the uncertainty over their eventual returns. People often struggle to plan their retirement and the new rates should offer a more helpful and realistic guide. We are in a low growth environment and have been for some time and it is pointless letting people hope for high returns that might never materialise – this is a reality check’.

If you have any questions about these changes or want to discuss pensions planning in detail, just call us on 01676 521111. You can also read more in our section on Retirement and Pensions Planning.

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Adrian Smith

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