Personal Pension  

A cocktail for decumulation

This means that new personal pensions key features illustrations must now show inflation-adjusted growth figures and use new projection rates of 2 per cent, 5 per cent and 8 per cent. The effect of charges and reduction in yield information are now to be based on the new and lower intermediate percentage of 5 per cent.

However, inflation adjustment is not yet mandated for transfer value analysis reports, income drawdown or annuity illustrations . That said, the Financial Services Consumer Panel’s response to this change advocated extending real-term projections to all these illustrations in due course.

Naturally in the industry itself, there have been loud objections to inflation-adjusted illustrations. One key criticism is the fact that neither of the key changes detailed in PS13/02 is being forced on Isa and general investment account product illustrations, creating an uneven illustrations playing field at a time when personal pensions are already under the cosh.

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Furthermore, the fact that the new low flanking rate is 2 per cent and the inflation adjustment percentage pushes figures down by around 2.5 per cent (it is calculated as 2 percentage points above Bank of England base rates) mean that lots of pension scheme holders will be seeing negative growth projection numbers on KFIs that they receive from now on.

Recent research, found that many consumers simply do not understand inflation. Money Advice Service research published last August also shows there is a good deal of education to do in this area before everyone fully grasps the array of numbers being provided to them in illustrations. One worrying statistic that came out of MAS’ Financial Capability of the UK Report was that 12 per cent of UK consumers think the BoE base rate is currently set at over 10 per cent.

So far so confusing. Explaining why a typical pensions projection has more than halved in value since the 6 April, if compared to the pre-April KFI, this is a grim prospect for advisers right now.

To illustrate the point, we put together a mock illustration for a 50-year old female with an existing pension pot value of £100,000 who is contributing £5,000 a year and has a target retirement date of 70. In this scenario final fund values fall from £460,000 in the pre-April illustration to £206,000. If you look at the new intermediate projection rate, which was previously 7 per cent and is now 5 per cent, minus the current inflation rate of 2.57 per cent, it leaves just 2.43 per cent ‘real’ growth.

Table 1: Contrast between old and new KFI rules

Illustration for a 50-year-old woman with a £100,000 pension pot contributing £5,000 a year and retiring at 70.

Before 6th April KFI

5% growth7% growth9% growth‘Real terms’
Full Annuity£19,200£32,300£52,900£12,500
Residual Annuity£14,400£24,200£39,700n/a

After 6th April KFI

-048% growth2.43% growth5.36% growth
Full Annuity£7,550£14,500£27,700
Residual Annuity£5,660£10,900£20,800

Worse still, if clients fix on the lowest figure (2 per cent minus inflation), growth is currently negative meaning that this lady’s future contributions look like they are being eaten away by a combination of inflation and charges. Her plan is effectively flat-lining.

Table 1 shows the disparity between growth projections pre and post PS13/02 inflation adjustment and growth rate changes for this particular example.