The Financial Services Authority (FSA) is warning savers that their pensions are going to look smaller in the coming months. This is due to growth projections that most pension firms have used that are ‘grossly optimistic,’ and therefore have not given an accurate picture of how much pensions will really be worth at retirement.
Those looking to estimate their own retirement incomes can consult a pension calculator, as these allow savers to use a projected growth rate lower than the FSA’s current forecasts of 7% growth.
An annuity calculator can then help savers understand what this projected pension pot will be able to buy them in guaranteed income when they reach retirement.
The FSA has said that an independent report, carried out by accounts PricewaterhouseCoopers, “indicates that our maximum projection rates should be reduced.”
This is because it is “crucial that projection rates are set at a realistic level so that investors are not misled,” said Peter Smith, head of FSA’s investments policy.
The announcement comes after the regulators have been under increasing pressures to lower their projected rates because investors were being misled and “surprised” at retirement by much smaller pension pots than they were expecting. It’s especially important that FSA’s projected growth rates match reality, as a majority of investments in the UK are based on their projections.
Though savers are told in legal documents that the figures used to predict their investment growth are only projections, it’s only natural that savers will expect their investments to be within reasonable distance of the projections, particularly if the projection figures come from the City regulator.
Projected growth rates do not affect those with final salary or other defined benefit pensions, as these pensions are guaranteed by employers. However, the millions of Britons with defined contribution or money purchase schemes, whose investments are the mercy of the markets, will be affected and will likely receive new projections that are much smaller.
The FSA provides 3 different scenarios for pension growth, with a “low” estimate starting at 5%, an “intermediate” estimate – that is often used by pension companies – at 7%, and a “high” rate at 9%. These will likely be taken down to more realistic rates after FSA consultations.
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