Why your pension may not pay out what it projects

MILLIONS of savers could face a poorer retirement than they had hoped for due to flawed projections of how much their pension pot might be worth at retirement, a new report suggests.

Every year, the 20 million or so workers paying into a workplace pension receive a statement from their provider projecting what their pot could be worth when they retire. The forecasts are designed to help workers plan for retirement and ensure they are saving enough for the lifestyle they want.

But a report published today by wealth platform Interactive Investor and consultancy LCP suggests these projections could be wildly optimistic. What’s more, there is little consistency in how pension providers calculate projections.

Pension providers make a series of assumptions to predict what a pension pot will be worth in the future. These include what the investment returns on the pot will be, what pay rises workers will receive during their working lives and what the rate of inflation will be over that time.

The report found that projected annual returns vary between four and seven per cent. This could lead to differences between projections amounting to tens of thousands of pounds. Assumptions about the rate of inflation and salary growth also varied.

Furthermore, actual annual average investment returns have fallen significantly in recent years, from 4.2 per cent in 2007 to 2.4 per cent in 2017 – the latest date for which there are official figures. Therefore someone basing their retirement plans on optimistic forecasts may be in for a terrible shock.

Becky O’Connor, head of pensions and savings at Interactive Investor, says: ‘Now more of us have defined contribution pensions and will depend on them. Thanks to autoenrolment, we may need to put more into them, if that’s possible.’

She adds: ‘We also need to take care when using online tools and looking at pensions statements. The i nvest ment gr o wth rate assumptions underpinning them may not be realistic.’