How do you work out your projection rates?

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We make assumptions based on our best estimate of the returns we expect certain types of investment (asset classes) to produce over the medium to long term.

For funds investing in a single type of investment, we use the following assumptions:

Investment type Life funds
(medium growth rate)
Pension funds
(medium growth rate)
Cash 1.0% 1.25%
Government bonds 1.6% 2.0%
Corporate bonds 2.4% 3.0%
Property 5.0% 6.0%
UK equities 6.9% 7.0%
Overseas equities 6.33% 7.0%

Please note: these are the ‘raw’ returns we estimate for each asset class, not the returns you’ll see on your illustration, which will be adjusted for inflation and charges (if you’re a pension investor) or just charges (if you’re an ISA investor). In addition, in line with FCA guidelines, if our estimated return for a fund at the medium growth rate is above 5%, we’ll reduce this to 5% on your illustration before allowing for charges and inflation. 

For funds investing in a mix of investment types we calculate a projection rate based on the percentage invested in each investment type multiplied by the appropriate rate for that investment type.

So, for example, if a pension fund has 60% in overseas equities, 30% in government bonds and 10% in cash, the calculation would be as follows:

  % invested Assumed annual rate of return Weighted annual rate of return
(column 2 x column 3)
Overseas equities 60% 7.0% 4.2%
Government bonds 30% 2.0% 0.6%
Cash 10% 1.25% 0.13%
Fund projection     4.93%

The weighted growth rate of 4.93% is then rounded to the lower 0.25% i.e.  to 4.75% and finally would be capped at 5% should it exceed this. Again, on illustrations, these would be further reduced for the effects of inflation and charges (pensions) or just charges (ISAs).

For certain funds that use alternative approaches, such as absolute return funds, the projection has been based on the fund’s target, for example UK Retail Prices Index + 3.5%.

We regularly review our projection rates and will change them from time to time. These rates are current as at 30 July 2015.