The Financial Services Authority (FSA), our regulator and watchdog, is introducing changes from 2014 regarding the projected growth rates used to give pension savers an idea of what their pension pot might be worth when they retire.
Many experts believe that the lower rates of projections being introduced will give savers a much needed wake-up call to think about saving more towards their retirement, and at the same time provide pension savers with a more realistic idea of the money they can expect to receive in retirement.
Currently, pension illustrations and annual statements show the projected value of an individual’s pension fund if it grows by 5%, 7% or 9% per year. Pension providers currently use the 7% rate as an “intermediate projection rate”.
After the changes in 2014, the rates required by the FSA will be cut to 2%, 5% and 8% with 5% as the new intermediate projection rate.
While the change will not reduce a person’s actual savings, it will significantly reduce the valuations shown on paper of an individuals’ pension pot.
The FSA want to stop pension providers giving savers a false impression about how much their pension pots might be worth at retirement – they believe that using the 7% figure for the intermediate projection rate does not provide a fair or accurate indication of the future value of a individuals pension pot given the current economic climate, and the forecast for future growth.
This means that someone who is 25 and earning £30,000 and saves £2,000 a year into a workplace pension could have expected to have a projected retirement pot when they reach 68 of £588,761 based on the 7% intermediate projection rate.
However under the new rules and using the 5% intermediate projected growth rate that providers firms will have to use, this same pension saver would now have a projected pension to be worth just £371,626. The change means that the individuals predicted pension income will fall from £7,406 a year to £4,674 a year, a drop of 37 per cent.*
With new changes being introduced affecting your entitlement to a basic state pension and the outlook for lower growth, it is more important than ever to consider, plan and take action on your retirement goals.
If you would like assistance in planning for your retirement, then please contact your consultant on 0161 975 6700.
*Source Invidion: Assuming – gross contributions rising by National Average Earnings per annum, using an annuity rate of 6%, annual management charges of 1% per annum.
