Shrinking SIPP pension projection rates continue

Shrinking SIPP pension projection rates continue
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Once again, the FSA lowers projection rates for SIPPs and personal pensions

Almost one and half years ahead of time, the Financial Services Authority (FSA) has disclosed it’s cutting the projection rates providers must use when they calculate the likely returns on personal pensions and SIPPs.

This cut in projection rates is meant to give people are more realistic idea of the true level of income they’ll have to live on when they retire.

At the moment, personal pension providers are required to project their funds by 5%, 7% or 9% a year.  These are massively lower than the rates used in the 1990s. But, under proposals issued by the FSA, from 6 April 2014, the projections will based on reduced annual growth rates of 2%, 5% and 8% a year.

The FSA has reported that these new lower rates will ensure personal pension and SIPP policy holders are not misled by the false impression they might get a high return on their money.

A spokesman for the FSA said the purpose of the changes will ‘reduce the risk of consumers being given information on the potential benefits of investing in a life or pensions contract which is based on inappropriate assumptions’.

Commenting on this news was Tom McPhail, who is head of pensions research at Hargreeves Lansdowne. He said the Financial Services Authority had made a sensible decision that would better manage investors’ expectations of what they might get back on an investment or a SIPP. He added: ‘Economic circumstances now make a 9% annual growth rate look highly optimistic.’

However, there’s a very important point to stress.

These are changes to projection rates.  Whilst they are meant to reflect market conditions, these changes have absolutely no impact whatsoever on the actual returns SIPP pension policy holders will receive on their money. In practice, whenever a projection rate is used, chances are it’ll be wrong, simply because reality will almost always be different.

This view was reflected by Malcolm Maclean, consultant at Barnett Waddingham, an independent firm of actuaries and consultants, and a SIPP operator.  He said: ‘It must be emphasised, though, that these are still only projections, not a cut in real terms, and that under any scenario investors need to keep a check on how their plans are progressing at regular intervals and take whatever action is necessary to stay on course.’

This change is principally aimed at the vast majority of personal pension customers who have money invested in stockmarket investments.  SIPP holders not only can put their money into stockmarket investments, they also have the advantage of being able to invest in a wide range of lending and investment opportunities.  Many of these deliver higher returns than even the current FSA projection levels.  But it’s not all plain sailing, as the prospect of higher returns almost always comes with an increased level of risk. 

Given the current level of annuity rates, which have plummeted by roughly two thirds in the last twenty years, it’s not surprising SIPP holders are increasingly seeking out investments that will add additional value to their pension pots.

How the press has reported this online

This Is Money

Personal pension holders in for a shock when estimates of retirement fund values are slashed from 2014

Projection rates for personal pensions will be reduced by the Financial Services Authority (FSA) to give savers a more realistic view of their retirement fund. Currently, 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, while taking into account the impact of charges. Read the full story on This Is Money.

The Guardian

FSA to cut pension projection rates

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 would 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. Read the full story on The Guardian.

BBC News

Pension projections cut by FSA to stop 'false impressions'

Projected investment returns on pension plans must be reduced from 2014, says the Financial Services Authority (FSA). The City regulator wants investment firms to show more realistic, and also less optimistic, potential returns than those currently used. It said this will reduce the chances of investors getting a "false impression" of the value of their potential future pensions. Read the full story on BBC News.

The Telegraph

New FSA rules to wipe thousands of pounds off people's pensions

Investors will see their future retirement fund reduced by thousands of pounds when they open their annual pension statement in 2014. Regardless of how much money they invest next year, or how the stock market performs, most will see the size of their projected retirement pot fall thanks to the way future returns are calculated. The Financial Services Authority has confirmed that it will reduce the standard projection rates used to indicate investment returns and the impact of charges on these savings plans. Read the full story on The Telegraph.

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