Personal Pension  

‘Using 5% growth rates on assets misleads clients’

‘Using 5% growth rates on assets misleads clients’

Self-invested personal pension providers and insurers are using standard projection rates for retirement savings, which risks confusing clients and making advisers’ jobs harder.

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.

The software provider’s annual market review of growth rates shows the range of expected returns submitted by 40 insurers, Sipp and wealth management firms.

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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 he would expect the growth rates used in drawdown illustrations for existing clients to reflect something closer to their actual holdings.

Mr Hodges said it would be surprising if all clients were in assets that could fully justify using the top 5 per cent rate.

He 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.

Mr Hodges said the breadth of rates being used was inconsistent and unrealistic, made advisers’ jobs difficult and created confusion for consumers.

“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 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 need to be supported in making wise choices about where their money is invested when they are in drawdown, and they need to continue to review that,” he explained.

Adviser view

Peter Chadborn, IFA at Essex-based Plan Money, said: “There is an obligation on providers and advisers to put any forecast into context, whether that is byallowing for inflation or making sure growth rates are realistic in relation to the underlying investment of their clients.”