By Tanya Jefferies
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Investment houses and pension providers will have to be more realistic about future returns and charges under a new regime proposed by financial watchdogs.
In recent years, investors have been left disappointed by big shortfalls between projected returns and actual performance.
The Financial Services Authority now wants to tighten the rules with the middle-of-the-road average projection now just 5 per cent per year and the most cautious expectation only 2 per cent.
No promises: Financial firms always emphasise that projection rates for their products are not guaranteed
The watchdog plans to make financial firms reduce projections, and revise them down even further if they start looking unlikely.
At present, firms must give three different 'projection rates', which come with no guarantee but are meant to give investors some idea of what returns to expect from products.
Personal pension investors will be told to trim expectations from the current 5 per cent, seven per cent and nine per cent a year, to two per cent, five per cent and eight per cent.
For a £10,000 lump sum invested over 20 years that would slash the return on the middle forecast from a final pot of £40,387 to £27,126.
It may, therefore, mean savers will need to dramatically increase the regular amounts they put away to reach their previous pension pot targets. [Pension pot calculator]
The FSA offered examples of how its new system might reduce rates on products such as pensions, endowment policies and inve stment bonds (see box below).
The new proposed rates are not only lower than the old ones but cover a wider range.
This is significant because many investors have been caught out by stock market volatility in recent years.
The FTSE 100 has seen large swings in annual returns since the financial crisis - it was down 31 per cent in 2008, up 22 per cent in 2009, up 9 per cent in 2010 and down 6 per cent last year.
This seesawing is in contrast to the late 1990s and mid-2000s. For instance, the Footsie saw an unbroken succession of increases from 1995 to 1999, and returns were in double digits in four out of these five years.
Although financial firms always emphasise that projection rates for their products are not guaranteed, they can still influence investor decisions.
For instance, people will take them into account when calculating how charges might eat into their eventual returns.
CURRENT PROJECTION RATES / PROPOSED RATES
The FSA has reviewed projection rates every few years since 2001, but this is the first time it has suggested changes.
Its proposals cover investment products including pensions, share ISAs, tax-free savings plans, endowment policies, investment bonds and whole of life policies.
Sheila Nicoll, director of conduct policy at the FSA, said: 'Investors need to be able to trust information they receive and any suggestion as to how their investment might grow in future must not be misleading.
'We are proposing lower growth rates which firms may use but we are reinforcing the fact that these are maximum levels. Providers and advisers need to take a long, hard look at the rates they use, taking account of the underlying assets they are dealing with.'
The FSA is now consulting on its proposals, including how to ensure projection rate consistency between personal pensions and money purchase/defined benefit schemes.
The watchdog is al so considering whether to make all advisers use a standard CPI inflation rate assumption when assessing whether someone would be better off in a defined benefit scheme or a personal pension. The consultation on the above issues is open until August 31.
Meanwhile, the FSA is consulting on revised mortality rates following the European Court of Justice ruling requiring insurers to charge the same rates for men and women. It is seeking views on this until June 29.
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Oh joy... that's the return on my endowment down the toilet then!
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Believe you or not, I'm going nowhere near the stock market. I don't have the time , the instant communication with a stockbroker, or continuous access to market information that are necessary in order not to lose my shirt within a matter of hours or even minutes. The useless FSA would do better to explain why they allowed the banks to come close to wrecking the whole financial system and why they still have no comment to make about the banks robbing savers of an estimated £100 billion these past three years.
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Believe me you can do it yourself very easily and strip 20% a year from the markets, even half of this amount 10% is far better than what the FSA are now assuming! The real problem here is that people are buying and holding when it's not the right environment for a buy and hold strategy - these times do exist but since 2000 and your pension companies and IFA's will not tell you this because they do not know or understand. 10% compounded up over the years double your money in no time, it then becomes easier and easier to double it - Do not fall for the hype, 2-3 trades per year can quite easily return 10-20% you don't even have to bother about what market you make those gains from it could be FTSE100, SP500, Cotton, Wheat, Sugar, Crude Oil or even any stock. Take responsibilty for your money and do it yourself - the "experts" continually prove that they can't do it properly so don't let them.
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