The Financial Services Authority (FSA) is thinking about lowering the standard projection rates used on investment and pension illustrations.
This move would reduce the chance that investors were misled by unattainable high projection rates.
As things stand, illustrations for most regulated investment products contain projections assuming annual investment returns of 5%, 7% and 9%.
Some products, such as collective investment schemes and mortgage endowments, currently use 4%, 6% and 8% rates.
These rates have not been reviewed since 2007, when the regulator concluded that they remained appropriate.
In this low interest rate environment, lower projection rates would set more realistic expectations. Whilst it is important that these projection rates are set at a realistic level, investors should take care not to view them as a guaranteed or expected return.
What these projection rates are useful for doing is allowing a like for like comparison between different investment products.
When the projection rates used are the same, any difference in projected fund value will be the result of product charges. Product charges are of course not the only factor investors should consider when deciding on the most suitable product.
Rather than considering the projection rates used on illustrations, a better approach for determining the likely outcome from an investment or pension product is to determine a possible return based on risk taken. This should be reviewed at least annually to adjust expectations based on actual investment returns.
Photo credit: flickr/mr_t_in_dc
