Changes to pension statements could see some pension savers receive significantly different estimations compared to previous years.
Currently, pension scheme members receive a statement each year showing the current value of their pension pot as well as an estimation of what it could be worth when they retire and the income it could buy.
However, from 1 October 2023, when working out what a pension could be worth in the future, today’s value will be rolled forward and increased by a growth rate linked to the volatility of the funds it’s invested in.
What does this mean for pension statements?
The higher the volatility, the higher the growth rate and the estimated final value.Some pension savers may see big changes to the estimated values shown on their annual pension statements this year compared to previous years. For example, if they have chosen volatile investments then the estimated future pension pot and the income it could buy may end up being substantially bigger than shown on previous year’s statements. Similarly, if they have chosen less volatile investments, these figures could be lower.
There are four different growth rates – 1%, 3%, 5% and 7%. These rates are based on how much and how often the price of a fund has changed over the last five years. However, these rules apply only to funds. If the pension saver holds, for example, property or equities directly in their pension, then these investments are assumed to grow at 5%.
Pension savers must also remember that there has to be a deduction for inflation against future increases to enable the pension statement to show estimated figures in today’s prices. This gives pension savers a better indication of what their future pension could be worth.
Other changes include always assuming the fund buys a pension only for the pension saver for their lifetime and that it doesn’t increase in value. The pension saver could see a big increase to the estimated pension income their fund could buy, especially if the pension scheme had previously assumed that a spouse’s pension would be paid on death or the pension would increase in value each year.
Rachel Vahey, head of policy development at AJ Bell, warned that the changes may prompt some savers to question their pension value.
“The only thing that is changing is the calculations used to produce forecasts. It means someone could hold the exact same investments in their pension from one year and their future retirement prospects are totally unchanged but the value they see projected could be completely different. This will inevitably cause some customers to question why that is and trigger concerns about whether their pension has fallen in value.
“Both advisers and their clients and non-advised retail investors may need to consider these statements to help them understand what has changed. It’s important to remember these figures remain a ‘best guess’ only.”
According to Vahey, the final value of savers’ pension funds and income will depend on many factors, including when they take their benefits, economic conditions, future contributions, the actual investment return and future decisions on investments.
