The Financial Services Authority has revealed how it will cut the rates used to project returns on personal pensions and life insurance policies to give savers a more realistic idea of the payouts they will receive.
Currently, pension and life providers show savers a rate of return based on what will happen if their savings grow by 5%, 7% or 9% a year. But, under plans published by the FSA yesterday, the projections will based on rates of 2%, 5% and 8% annual growth.
According to the FSA, the new projection rates, which will come into force on April 6 2014, will ensure savers do not get a 'false impression' of the return they might get on their savings. The changes also 'reduce the risk of consumers being given information on the potential benefits of investing in a life or pensions contract which is based on inappropriate assumptions', it added.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said the FSA had made a 'sensible' decision which would better manage investors' expectations of what they might get back on an investment. 'Economic circumstances now make a 9% annual growth rate look highly optimistic,' he noted.
But, he stressed that the projection rates had no impact on the actual return investors get. '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,' he said.
This was echoed by Malcolm Maclean, consultant at Barnett Waddingham, who said: 'It must be emphasised, though, that these are still only projections, not a cut in real terms, and that under any scenario investors need to keep a check on how their plans are progressing at regular intervals and take whatever action is necessary to stay on course.
'The inability to quantify actual returns in any precise sense with these type of pension arrangements is a reminder of the great gulf that exists between defined benefit and defined contribution plans and the desirability going forward of providing more certainty in the latter on the basis of a "defined ambition" model currently being considered by the Department for Work and Pension.'
Joanne Segars, chief executive of the National Association of Pension Funds, also highlighted the importance of people regularly checking how much their savings were likely to be worth in retirement.
'The UK is not saving enough for its old age, so it is important to help people see how much they need to salt away,' she said. 'A reformed simpler, flat-rate state pension will also enable people to make stronger retirement plans.'