Changes to pension illustrations

Inflation-adjusted pension illustrations

On 6 April 2014 the Financial Conduct Authority introduced new rules for pension illustrations. The rules mean that illustrations which show the projected (or future) value of your pension savings, and the benefits that can be bought from those savings, must be discounted at a rate of 2.0% a year.

The discount is applied to reflect inflation; in other words, the fact that if your pension fund is invested for a number of years, the cost of goods and services will rise in the meantime and the true value of your money (in terms of what you can buy) will decrease. Nobody knows what the real rate of inflation will be, so it could be more or less than 2.0%. However, in general, the rules were introduced to:

• give a better indication of the buying power your current savings might provide in the future
• give consistency to the way your pension savings are shown by different providers.

Understanding the growth rates shown on our illustrations

The Financial Conduct Authority tells providers like us the percentages we must use to calculate the potential future value of your pension (as well as other financial products). These percentages are called ‘fund specific growth rates’. View a table of the fund-specific growth rates we use when we produce an illustration for you.

The growth rates we use differ depending on the funds you hold; for example, a cash fund would be expected to grow by a lower percentage over time than an equity fund. And because future investment returns are uncertain, we show three different scenarios of projected growth on illustrations – high, mid and low.

To adjust these projections for inflation, we deduct 2.0% from each of the low, mid, and high growth rates. For example, if the projected ‘mid’ growth rate for a pension invested in an equity fund was 5%, the rate we would show on your illustration would be 3.0% (in other words, after 2.0% has been deducted). These projected growth rates do not take into account any charges that apply to your pension.