Projected worth of pensions to fall sharply

Employees who are members of personal pension plans will see the projected worth of their pension pots fall sharply from 2014.

The Financial Services Authority (FSA) is to reduce the projected annual growth rates from April 2014, which will affect plans such as self-invested personal pensions (Sipps) and stakeholder pension schemes. However, group personal pension plans (GPPs) are not covered by projected annual growth rates.

Predicted growth rates are used to give pension scheme members an idea of what their pension pot will be worth when they come to retire. The rates are used to calculate the predicted value of funds if they grow by a certain percentage a year.

The higher growth rate will be reduced from 9% to 8%, the intermediate rate will be reduced from 7% to 5%, and the lower rate will be reduced from 5% to 2%.

In a policy statement, the FSA said that life pension providers and advisers will be able to comply voluntarily with the new projection rates from 6 April 2013.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “The FSA is taking a sensible decision to reduce the standard projection rates in order to better manage investors’ expectations of what they might get back.

“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.

“It is vital that investors don’t just look at a projection once and then forget about it for the next 30 years. 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.”