Pension Forecasts To Be Slashed By FSA

People are to get more realistic estimates of the value of their retirement pension pots under plans announced by the City watchdog.

The Financial Services Authority (FSA) said it will reduce the standard projection rates used to show possible future returns and the impact of charges.

The new calculations will show more realistic forecasts for consumers taking out personal pensions and life policies.

It said the move will reduce the possibility of Britons being given a "false impression" of the size of their potential cash pots.

Firms will have a year to implement the new projection rates, which come into force in April 2014.

Under the current system, companies must use projection rates to show what returns an investor might receive. These are  not a firm guarantee but give an idea of what people might gain from their investment.

They are meant to give three different rates of return and revise them down if a product appears unlikely to achieve them.

The FSA has been consulting on plans to strengthen these rules after finding providers often fail to comply with this requirement.

Under the current system, a pension statement shows what a pension will be worth if it grows by 5%, 7% and 9%.

But the FSA said projection rates will be cut to 2%, 5% and 8% to make sure customers are not given potentially misleading or exaggerated information.

With historic low interest rates many people have found downward pressure on their investments, including pensions.

The changes could lead to people re-considering their plans for retirement.

At present, a 22-year-old earning £30,000 a year who contributes just under £2,000 annually to their pension is told that their projected pension income would be around £10,300 on retirement at 68, based on a mid-point growth rate of 7%.

But under the new mid-point growth rate of 5%, the projected income would be thousands of pounds less, at around £6,400, according to research from financial services provider Hargreaves Lansdown.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said: "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."