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Pension pots to set to plummet under new FSA rules

Millions of pension savers could see a significant drop in their retirement pots under new rules requiring pension firms to slash growth forecasts in the wake of the economic downturn.

The new rules from the Financial Services Authority (FSA), which will come into effect from 2014, will mean that the so-called “intermediate projection rate” used by pension companies to predict the future value of pensions, will be reduced from a current figure of 7% to 5%.

The changes will mean retirement funds could fall by almost 40%. As an example, under the current system a worker in their 20s who earns £30,000 and saves £2,000 a year into a workplace pension is expected to have amassed a pension fund of £540,000 by the time they reach 68.

However, the new rules will mean that this would be valued at a lower figure of £335,000, falling from £10,400 a year to £6,430 a year, a drop of 38%.
An FSA spokesman called the central rate of 7% “inappropriate” given the current economic climate, and argued that it gave pension holders a “false impression that they are likely to get huge returns”.

“We think that people who are making a long term investment deserve to have a pretty good indication of what they are likely to get back,” the spokesman added.

Joanne Segars, the chief executive of the National Association of Pension Funds (NAPF), which represents the pensions industry, argued that the new rules will give pension companies a “reality check.”

“We are in a low growth environment and have been for some time. It is pointless letting people hope for high returns that might never materialise,” she said.

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