How can I find out more about projection rates?22 December 2015 Back to results
We’ve put together a list of commonly asked questions about projection rates. If there’s anything else you need, you can use our contact form(Opens new window)(Opens new window), call or write to us(Opens new window)(Opens new window), or tweet us(Opens new window)(Opens new window)(Opens new window)(Opens new window)(Opens new window).
These are estimates we use in personal illustrations to show the potential returns for an investment in a pension fund. They’re based on the types of investments in a fund.
It's a regulatory requirement to show low, mid and high projection rates to give you an idea how much your savings could be worth when you take your benefits.
Low and high rates are 3% below and 3% above the mid growth rate, respectively. It’s possible that the low rate could be a negative growth rate. For example the mid rate for the Cash fund, if you’re in an insured pension fund is 1%. So the low rate would be -2.00%
It means that the estimated growth rate is lower than 2.50%, which is the rate of inflation that we use for projecting your future benefits. To keep your fund's current value you need growth rates that match the rate of inflation. For your fund to grow in value, you need growth rates that are higher than the rate of inflation. There is 3% difference between the low, high and mid growth rate so for example where the mid growth rate is 5.00%, after discounting for inflation it will be 2.46% and the low growth rate will therefore be a negative figure.
Projection rates are simply estimates - when you come to take your benefits, your pension income will depend on how your investments grow, interest rates and charges.
The low and high rates are worked out from the mid growth rate before it is adjusted for inflation. The unadjusted figure is then rounded down to the nearest 0.25%.
Why are your projection rates different from other providers’ rates?(Expand content) (Minimise content)
Each provider decides the rates of return they believe are suitable for different types of investments. Some may be more or less optimistic. Different providers might use different rounding conventions to arrive at the mid rate. Charges and deductions will also vary.
Do the estimated fund values shown include any fund or product charges?(Expand content) (Minimise content)
Estimated fund values in illustrations are shown after all charges have been deducted.
How do you calculate the projection rate for my fund if it has different investment types in it?(Expand content) (Minimise content)
We use the projection rates we’ve agreed for that asset class where a fund invests in one type of investment, for example equities.
Where a fund is invested in more than one type of investment, for example asset classes such as bonds, UK equities, cash, property, to get an assumed mid rate of return for each asset class we need to multiply by the percentage invested in each asset class and add these together to get the overall mid rate for the fund. The low and high rates are 3% below and 3% above the mid growth rate. The projection rates we show are after we’ve made an adjustment for inflation of 2.50% a year.
So, for example, if a fund invests 50% in UK equities, 30% in UK corporate bonds and 20% in government bonds, the mid rate would be:
(0.5 x 5.40*) + (0.3 x 3.20*) + (0.2 x 2.40*) = 4.14 which we round down to 4.00% as we round down to the lower 0.25%.
* is the mid rate for that investment
We then adjust this for inflation of 2.50% to show this in real terms which gives a mid rate of 1.46%.
Because that is the rate the regulations require us to use. We use inflation of 2.50 % on the Low, Medium and High growth rates to show the effect of inflation on your estimated pension benefits.
If you're investing in several funds (portfolio), to calculate the portfolio weighted rate we multiply the fund weighted rate for each fund by the proportion (%) it forms of the total portfolio. Once the portfolio weighted rates for all funds have been calculated, we add them together to get the overall portfolio weighted rate. The overall portfolio weighted rate will be rounded down to the lower 0.25% to get the mid rate and then adjusted for 2.50% inflation.
We’ll use the manager’s benchmark or average asset allocation - or discuss the long-term strategy with the manager - and apply weightings to arrive at an appropriate fund growth rate.
Lifestyle funds are only available to pension investors. When investors are still some way off from retirement, they’re invested in a fund that aims to grow their investments. We've a number of different lifestyle funds, some investing entirely in equities, others investing in a mix of investments. In the five or six years before retirement, lifestyle funds progressively move into investments better suited to helping protect annuity-buying power as retirement approaches, for example cash or bonds. These investments are generally regarded as having less growth (or loss) potential.
We take this change of investment strategy into account when calculating the projected maturity value for a lifestyle fund at retirement. Otherwise the projected maturity values would be unrealistically high because it would be based solely on the investments in the growth stage of the lifestyling process.
Find out how changes in the way we show projection rates affects your pension or investment product [link to ‘Changes to our projection rates]
I pay regular contributions but the table shows these as reducing?(Expand content) (Minimise content)
We’ve assumed that you’ll pay the same contributions (taking account of any increase in contribution that you've chosen) for the life of your plan. However - like your investments - these are affected by inflation, so we’ve shown these contributions after an adjustment for inflation of 2.50% a year. This is a regulatory requirement for all pension providers.
My statement mentions tax-free cash but not how much it will be?(Expand content) (Minimise content)
We don’t show a projection for tax-free cash if your pension could be less than £120 a year.
Why do yearly statements projections show tax-free cash of 25% of fund value?(Expand content) (Minimise content)
We didn’t used to show tax-free cash. We’ve included this option because most of our customers take this.
You may be entitled to more or less than we show, for example you’d be entitled to more if you have fund protection.
What’s changed for savings and investment products, for example endowments, ISAs or bonds?(Expand content) (Minimise content)
The nominal rates (which aren't adjusted for inflation) which we use in illustrations have been reduced to:
Other pension providers are still providing illustrations on the old basis - why can’t you?(Expand content) (Minimise content)
All providers must comply with the new regulations by 6 April 2014. However, they could make the changes earlier - which is what we’ve done. Even before these changes not all providers used the same assumptions and growth rates.