Realistic pension projections

When you save into a pension plan, the provider is obliged by the FSA to give you an illustration showing projected benefits at retirement.

These illustrations are largely standardised, making it easy to compare one provider with another.

If both providers are making the same assumptions about future investment growth, then any difference in the projected pension fund value will be the result of product charges; the illustration for the more expensive plan will show a lower final fund value.

The projections used by pension providers are never guaranteed.

Your pension fund may grow by more or less than the rates assumed, and this is always made very clear by the provider and any adviser involved in the process.

You might have read today that the rates used in these pension projections are set to change.

The FSA is giving pension providers until 2014 to implement new rules which will reduce the standard growth rates used, resulting in a less optimistic forecast of pension benefits.

It is important to note that these rule changes do not result in any changes to the actual value of your pension plan at retirement. Only the assumptions about future growth change, not the size of your pension fund or the amount by which it will grow (or fall) in value in the future.

What you should ignore as a result of this news is any headlines which claim money is being wiped off the value of your pension fund. The projected value of your pension fund might very well be lower in the future, but only the projected value is changing, not the actual value.

Speaking to a journalist about this news earlier, I pointed out that the regulator needs to strike the right balance.

On one hand, they need to ensure that any projections used by pension providers are realistic and do not mislead investors into thinking that they will receive more than is likely in retirement. On the other, projection rates which are unrealistically low could discourage investors for making provision for retirement.

What investors should be doing is considering what assumptions about future growth are right for them based on their individual goals, objectives and the underlying asset mix of their pension funds.

These assumptions should be reviewed at least once a year, as economic and market conditions change, in order to ensure a retirement plan stays on the right track.

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