Pension savers will see thousands of pounds shaved off their predicted future retirement pots from 2014 under the City regulator’s plans to give them a more realistic idea of potential returns.
The Financial Services Authority (FSA) said it will reduce the standard projection rates used to show possible future returns and the impact of charges for someone taking out a product such as a personal pension or a life policy.
It said the move will reduce the possibility of consumers 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, firms are required to use projection rates to show what returns an investor might receive, which are not a firm guarantee but give a flavour 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 this.
But the FSA has been consulting on plans to strengthen these rules after finding that 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 five per cent, seven per cent and nine per cent. But the FSA said the projection rates will be cut to two per cent, five per cent and eight per cent to make sure customers are not given misleading or exaggerated information.
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 per cent.
But under the new mid-point growth rate of 5 per cent, the projected income would be around £6,400.