Understanding the Changes to Your Pension Illustration

February 29, 2024

If you are yet to retire, you may be familiar with the pension illustration usually found on your annual statement from your pension provider.

A pension illustration is a set of hypothetical figures providing a projection of what your pension might be worth at retirement. It is the result of a complex calculation taking into account multiple factors including, but not limited to, your expected investment returns. With the intention of helping you to plan for your future, the calculation is an estimate of what you could receive if you buy an annual income for life (an annuity) with your retirement portfolio.

Changes to pension illustrations

The Financial Reporting Council (FRC) recently updated the rules which dictate how the pension illustration for a Defined Contribution pension should be calculated. These rules are called the Actuarial Standard Technical Memorandum (ASTM1).

Put simply, there was previously scope for pension providers to use a little judgment in their calculation methodology. However, the new rules ensure consistency in the calculation methodology, regardless of your pension provider.

When do the rule changes apply?

Statements issued after 1 October 2023 are affected by the rule changes.

How do the rules changes impact my pension illustration?

We have focused on how the changes will impact on the pension illustrations calculated by Boal & Co. The impact on any other pensions you have may vary, depending on the way they were originally calculated.

Your pension illustration is now a “level” pension

Your previous pension illustrations were for a pension that would increase each year with inflation. The new illustration is for a “level” pension, which does not increase. This change causes an increase to your pension illustration compared to previous calculations.

The removal of a spouse’s pension on your death

Your previous pension illustrations included a provision for a spouse to receive 50% of your pension income in the event of your death. The new illustration no longer includes provision for a spouse. This change causes an increase to your pension illustration compared to previous calculations.

The inclusion of a 5 year guarantee after retirement

Your previous pension illustrations included no guarantee. The new pension illustration includes a 5 year guarantee, which means your pension would be paid for the first five years of retirement even in the event of your death. This change causes a very small reduction to your pension illustration compared to previous calculations.

Determining how your pension investments will accumulate

In calculating the pension illustration, an assumption is made on the future investment return earned on your investments. In the past this assumption was set at the discretion of the in-house actuary. However, with the recent changes, the FRC now dictates a calculation methodology to estimate future investment returns based on the risk profile of such investments. The impact of this change on your pension illustration will vary depending on the risk profile of your investments.

How can I find out more?

You can read more about ASTM1 here: Actuarial Standard Technical Memorandum: AS TM1 (frc.org.uk). Alternatively, contact your financial adviser or our actuarial team.