The City regulator must reconsider a rule change brought in on 6 April that could see advisers’ clients being told that saving into a pension could leave them worse off, Nigel Chambers has said.
The chief executive of CTC Software warned that changes to the rules affecting how advisers calculate potential growth rates in pension illustrations ran the risk of confusing clients and potentially putting them off saving into a pension.
He said: “It’s no surprise that people will be confused when they see the lower illustrated value of their pension for the first time. This is a complicated subject.
“We urge regulators to make a true level playing field for illustrations before investors are turned off investing in pension funds due to confusion and a lack of trust.”
Changes confirmed in the FCA’s policy statement 13/02 mean advisers are now required to illustrate potential future performance on a real-terms basis with a 3 per cent growth rate differential.
Research from pensions technology firm Dunstan Thomas showed that, before the changes a 50-year old woman contributing £5.000 a year to her pension (worth £100,000) currently would have received illustrations showing potential growth of her fund by 5 per cent over 20 years to £336,000, by 7 per cent to £460,000 and by 9 per cent to £631,000.
Under the new rules the illustrations for the same client based on real-terms growth rates now result in her fund shrinking over 20 years in real terms, including the eroding factor of inflation, by 0.48 per cent to £130,000, by 2.43 per cent to £206,000 and 5.36 per cent to £329,000.
Pension illustration: 20-year fund growth of £100,000 investment
| Before April 2014 | After April 2014 |
9% (£631,000) | 5.36% (£329,000) |
7% (£460,000) | 2.43% (£206,000) |
5% (£336,000) | 0.48% (£130,000) |
Jonothan McColgan, director and chartered financial planner at Bath-based Combined Financial Strategies, said: “I haven’t come across this being a problem yet and given that we already had to take inflation into account, I’m not sure if it’s more difficult after the rule change. It could put some people off, but it’s our job as advisers to explain why it looks this way.
“It’s potentially more of a problem for those who don’t have an adviser and get a new illustration this year showing what looks like a big drop and they have no-one to explain it to them.”
