The FSA to Reduce Pensions Projection Rates

The Financial Services Authority (FSA) has said that it is to reduce the projection rates that pension companies are allowed to use to illustrate potential returns on pension funds. The FSA feel that these measures will give investors the opportunity to see more realistic projections of what income they are likely to receive.

Pension companies currently show potential returns based on growth rates of 5%, 7% and 9% to give an indication of what pensions could be worth. From April 2014 the FSA wants providers to use the projections of 2%, 5% and 8%.  This will obviously make the projections look lower for those who are retirement planning, however it is hoped that the more realistic projections will encourage greater pension contributions as another attempt is made to close the much publicised savings gap.

The other reason for this of course is that the new projections will be a lot nearer to actual returns received in recent years.  In general, returns on investments have remained stagnant over the past 5 years depending on when money was invested, so having projected returns of 9% and basing retirement planning on this figure is unrealistic.

Example by The Money Map: Someone currently contributes £2,000 per annum to their pension for 45 years and takes the mid-growth projection. Based on old 7% calculation they could expect a pension of £10,000, whereas the new mid growth projection of 5% would indicate that a pension of just £6,400.  This will add extra concern as it will appear that even higher pension contributions will be required to maintain a decent standard of living in retirement.

The Money Map offer a comprehensive retirement planning service, whether you want to start paying into a pension, considering the merits of a Self-Invested Personal Pension (SIPP) or the straightforward purchase of an annuity.

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