Sipp providers and insurers are using standard projection rates for retirement savings, risking confusing clients and making advisers’ jobs harder, especially in the move to execution-only.
A number of Sipp providers are still using a 5 per cent mid-point growth rate as a standard across all asset classes, according to CTC Software whose annual market review of growth rates shows the range of expected returns submitted by 40 insurers, Sipp and wealth management firms.
According to CTC, while this may be understandable at the point of a new business application where no indication of investments have been obtained it does not tie in with the FCA’s view that a Sipp administrator needs to understand the underlying investments in a client’s portfolio.
Investment, life and pension providers have to calculate the potential future value of savings according to FCA guidance.
In April 2014 these were set for pensions and Isas at 2 per cent, 5 per cent and 8 per cent for low, mid and high projected returns.
Philip Hodges, director of CTC Software, said as an example he would expect the growth rates used in drawdown illustrations for existing clients to reflect something closer to their actual holdings.
He said it would be surprising if all clients were in assets that could fully justify using the top 5 per cent rate.
Mr Hodges also expressed surprise that a number of providers, although a reducing number, quoted mid-rates in the range of 7 per cent to 8 per cent, which were out of step with the market generally.
He said the breadth of rates being used was inconsistent and unrealistic, made advisers’ jobs difficult and creating confusion for consumers.
Mr Hodges said: “They could get answers from different providers that are markedly different.
“It makes it incredibly difficult for advisers to explain to a customer but because of the regulator they are obligated to.”
He said this was especially a problem given that recent FTSE performance has meant everyone who rushed into drawdown were seeing their savings go down.
He said: “In the short-term that is very significant.”
“Our view is it is still better to leave your pension within a tax shelter until you need the income but in doing so, you need to actively review your portfolio. Growth rates being used can be misleading.
“If I go into drawdown to take 25 per cent tax-free cash and leave the rest invested, I may get an illustration based on 5 per cent growth, which will likely be unrealistic in the short term.
“Consumers do need to be supported in making wise choices with where their money is invested when they’re in drawdown. and need to continue to review that.”
Peter Chadborn, IFA at Plan Money in Colchester, said: “There is an obligation on providers and advisers to put any forecast into context, whether that s allowing for inflation or indeed making sure that growth rates are realistic in relation to the underlying investment of their clients.”