You might have noticed some changes compared to previous statements
Have you received your annual pension statement recently? If so, you might have noticed some changes compared to previous statements.
If you are a member of a Pension scheme either through your employer or as a self-employed person, you will most likely receive a “Statement of Reasonable Projection” (S.O.R.P.) along with your annual pension statement. You may receive it by post although many Pension providers now send it online.
The purpose of this S.O.R.P. is to predict the likely future value of your pension based on a certain set of assumptions relating to future contributions, investment returns, annuity rates etc.
If you have checked yours recently you may have gotten a bit of a shock. A pension pot that last year may have been promising an annual income of €30,000 p.a. once you turn 65 or 66 may now be projecting an annual income of only €20,000 p.a. This is despite the fact that Investment markets have been performing strongly. How can that be?
What has changed over the last year is the projection rules predicting how your pension will grow over time.
In March 2021, the Society of Actuaries in Ireland published guidance that pension providers should adopt new standards when giving projections on pensions. Essentially, they wanted them to take a more “conservative” approach.
Their spokesperson said “the society has a duty to make sure that such projections are “fair, clear, not misleading” and given the continued trend of low interest rates, felt it was an opportune time to adjust these assumptions.
Because of the ongoing low interest rate environment they felt it would be over-optimistic to continue using the existing assumptions.
The new guidelines state that the assumed growth rate for equities which was previously 5% p.a. is now limited to 4.5% p.a.
The projected growth assumption allowed for more conservative assets such as Bonds has been cut more dramatically from 2.5% p.a. to 1.0% p.a. while Cash return have been cut from 1.0% p.a. to 0% p.a.
Pension providers must also rein in their assumptions on future Salary growth from 2.5% pa to 1.5%.
Firstly, don’t panic as it’s important to remember that the projections which appear on your statement are meant simply as a guideline.
The report does not change anything in terms of the value of your fund today. However, if you are concerned about the reduced estimates of future value then maybe you need to consider a couple of things around the pension.
Can you increase your Pension contributions?
It is worth checking on the projected future value of the pension using a range of forecasts. This way you can check across a range of outcomes and choose a solution that best fits with your circumstances. Affordability is the key factor at any given time and you may be in a position to increase funding over a period of time.
Could you make some changes to your Investment strategy? How long is your investment horizon? This is one of the more important factors when looking at the level of risk to adapt within your portfolio. Depending on your term to retirement you should speak with your advisor around what is the most appropriate level of risk for you at that time.
You also have to remember that Post Retirement, the majority of people chose the ARF option, so, even after you retire and start drawing down on your pension, the majority of the funds will remain invested. Your investment time horizon is both the time left to retirement and your expected life span afterwards. For most people that’s an additional 20 years after retirement.
The projected income at retirement on your pension report is based on an annuity. An annuity is a promise of an annual income for life based on the value of your fund at retirement. They are provided by most pension providers. However, most people don’t opt for this as rates are so low for annuities. Retirees tend to opt for Approved Retirement Funds (ARF’s) where they control the investment choices and how much they draw down each year.
Every persons circumstances are different so it is important to have the conversation with your financial advisor. Explore a range of projected outcomes for both pre and post retirement and ensure you review it at least once a year. By reviewing it regularly you will have a much better handle on the final outcome.
Conor Harte CFP® is a Financial Planner with Wealthwise Financial Planning who are based in Carrick on Shannon and Oranmore, Co Galway, www.wealthwise.ie
All details and views contained within this article are for informational purposes only and does not constitute advice. Wealthwise Financial Planning makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use.
Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland.#CI66141
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