On 6 April 2014 the Financial Conduct Authority introduced new rules for pension illustrations. The rules mean that illustrations which show the projected (or future) value of your pension savings, and the benefits that can be bought from those savings, must be discounted at a rate of 2.5% a year. The discount is applied to reflect inflation; in other words, the fact that if your pension fund is invested for a number of years, the cost of goods and services will rise in the meantime and the true value of your money (in terms of what you can buy) will decrease. Nobody knows what the real rate of inflation will be, so it could be more or less than 2.5%. However, in general, the rules were introduced to:
- give a better indication of the buying power your current savings might provide in the future
- give consistency to the way your pension savings are shown by different providers.
Which illustrations are adjusted for inflation?
All illustrations (also called ‘quotes’ and ‘projections’) for personal pensions and stakeholder pensions must be adjusted for inflation. This includes the majority of pensions we provide. If you have a Collective Retirement Account and are using capped drawdown or flexi-access drawdown, the projected values you receive from us when your account is reviewed (either for an annual or statutory review) will also be adjusted for inflation. Contributions, and income withdrawals from the Collective Retirement Account, are shown both with adjustment for inflation (in normal text) and without inflation adjustment.
The rules don’t apply to some other types of pension, such as final salary schemes. Please speak to your financial adviser for more information.
Understanding the growth rates shown on our illustrations
The Financial Conduct Authority tells providers like us the percentages we must use to calculate the potential future value of your pension (as well as other financial products). These percentages are called ‘fund specific growth rates’. You can find out more, and see what the rates are, on our dedicated webpage.
The growth rates we use differ depending on the funds you hold; for example, a cash fund would be expected to grow by a lower percentage over time than an equity fund. And because future investment returns are uncertain, we show three different scenarios of projected growth on illustrations – high, mid and low.
To adjust these projections for inflation, we deduct 2.5% from each of the low, mid, and high growth rates. For example, if the projected ‘mid’ growth rate for a pension invested in an equity fund was 5%, the rate we would show on your illustration would be 2.5% (in other words, after 2.5% has been deducted). These projected growth rates do not take into account any charges that apply to your pension.
This is a very complex area, so we recommend that you speak to your financial adviser for further help and guidance.
Why is the projected growth rate on my illustration showing a negative figure?
As explained above, the low, mid, and high growth rates we must use in our illustrations are set by the Financial Conduct Authority (FCA). These rates reflect the growth that different funds may expect to achieve considering stock market performance. The FCA also requires us to discount these rates by 2.5%, to account for inflation. These rates are not guaranteed and provide an illustration only; the value of your pension can rise as well as fall and you may get back less than you put in.
The growth rates for certain types of funds (particularly at the ‘low’ and ‘mid’ levels) are currently low and, in some cases, the growth is predicted to be negative (either before or after inflation has been deducted). This demonstrates that in a low growth environment, the returns from certain types of funds could fall behind inflation, meaning a real loss in the value of your savings over time.
Please speak to your financial adviser for more information and to discuss whether your choice of funds is suitable for you.