It's important, but never easy, to give customers an indication of what their pension might be worth when they take benefits.
This year, a raft of changes will affect the projected figures customers receive, and more are anticipated. If we're to avoid creating confusion, we need to help customers put these into context.
On investing, customers receive a key features illustration, showing projections at three growth rates.
Yearly statements update these, but in ‘real' terms, allowing for the effect of inflation. It's essential that the estimates we give customers remain realistic, but too many changes to assumptions can be bewildering.
Putting projection figures into context
Aegon is providing the background to the changes alongside yearly statements, but some customers may seek further help from their adviser.
Real world developments
Some changes reflect ‘real world' developments. It's widely expected that future returns on most asset classes will be lower than historically hoped for.
Providers must use projection rates that reflect realistic expectations of returns on the underlying asset classes, so within current regulations, customers can expect to see lower future projected returns.
Annuity rates have also come down because of historically low gilt yields and life expectancy improvements. This means annuity income from the same projected fund could be around 15% less than assumed a year ago.
This April, contracting-out on a defined contribution basis ended. This means customers who were contracted out in defined contribution schemes will no longer receive National Insurance rebates to boost their funds, again reducing their projected policy proceeds.
As a result of a European Court ruling, providers can no longer offer gender-specific annuity rates. While in reality, females on average outlive males, from 21 December, annuity rates won't be allowed to reflect this, meaning females could see their annuity rates rise, while males may see a further fall.
There are also presentational changes. While all providers should now be using ‘asset specific' projection rates in key features and yearly statements, there's a lack of consistency between the actual projection rates used, even for similar funds.
This doesn't help advisers or customers, particularly when comparing different pensions.
The Financial Services Authority (FSA) is consulting on ‘capping' the intermediate growth rate at 5%, rather than the current 7%. There would also be lower caps for the higher and lower rates on either side of the intermediate rate.
The proposed 5% cap is based on an independent report which concluded that a typical pension fund, invested two thirds in equities and property and one third in bonds would be unlikely to return 7%, and 5% might be more realistic.
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