Pension pots fall by up to 40% under new rules


Savers can expect to see the estimated value of their retirement pots plunge by almost 40% after the Financial Services Authority ordered pension firms to cut their growth forecasts due to the global economic slowdown.

The FSA said that from 2014 the predicted growth rates used to give investors an idea of what their pension pot will be worth when they retire must be significantly lower than they are today.

Currently pension companies use a so-called “intermediate projection rate” of 7% in statements to savers. As an example, someone in their 20s who earns £30,000 and saves £2,000 a year into a workplace pension can expect to have a retirement pot when they reach 68 of £540,000.

However under the new 5% rate that firms will have to use, this pot will fall to £335,000. The change means that this individual’s predicted pension income will fall 38% from £10,400 a year to £6,430 a year.

The new rules will also cover the expected growth of other financial products such as ISAs and endowments. From 2014 all statements about existing investments will use the new lower projection rates.

Although the change will be disappointing for savers when they open statements, the FSA said that it is pushing through the change to give people a more realistic view of what their investments will be worth.  It will also give savers a chance to adjust their retirement plans or make extra provision if they still have time.

An FSA spokesman said the regulator wants to stop companies giving savers the “false impression that they are likely to get huge returns” saying that a central rate of 7% was “inappropriate” given the current economic uncertainty.

“We think that people who are making a long term investment deserve to have a pretty good indication of what they are likely to get back,” the spokesman said.

The changes were announced following an independent review by accountants PricewaterhouseCoopers (PwC) and a consultation with financial firms.

At the moment, pension statements show the value of people’s funds if they grow by 5%, 7% and 9% a year. The central 7% figure is the “intermediate projection rate”. After the changes, the rates required by the FSA will be cut to 2%, 5%and 8% with 5% as the intermediate projection rate.

The FSA has cut the forecasts because investment returns have fallen over the course of the financial crisis. For example many pension funds have switched their investments from volatile stocks and shares – equities – into Government bonds which are safer but have lower financial returns.

The spokesman said: “Companies are moving away from equities and toward lower-yielding assets such as bonds so an intermediate rate at the lower end of the range provides the most realistic indicator of what an investor might receive from their investment.”

Joanne Segars, the chief executive of the National Association of Pension Funds (NAPF), which represents the pensions industry, said that the changes would avoid savers getting ‘nasty surprises’

 She said: “People often struggle to plan their retirement, and these new rates should offer a more helpful and realistic guide.

“The revised rates are still estimates and are not a promise of what the pension will look like. The best way for people to manage that uncertainty is to give their savings a regular MOT to see how they are faring.

“The UK is not saving enough for its old age, so it is important to help people see how much they need to salt away. A reformed simpler, flat-rate state pension will also enable people to make stronger retirement plans.”

The new projection rates will come into force in April 2014 but pension firms will be able to comply with them in promotional literature from 6th April 2013..

Andrew Cross of Arcus said ‘These changes highlight the need to examine your pension provision as soon as possible since time is running out.’

If you are concerned about your pension forecast or have any questions about saving for your retirement you can contact our associated financial planning business Mill Lane Asset Management for a no-obligation review of your retirement planning needs.  For more information call 01572 757 587 or e-mail Andrew Cross at andrew.cross@MillLane.com.


  • Date posted:
    02/11/2012
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