The industry regulator, the Financial Services Authority has spoken out regarding the industry standard projection rates.
These projection rates show what you might get back at the end of your policy and are included on illustrations and annual statements given out to policyholders from all insurance companies and providers.
Currently, investments and savings plans are projected at 4%, 6% and 8%. Basically, the figures tell you what you could get back if growth on your fund is 4%, 6% or 8%, after the charges have been taken into account.
With pensions and tax-privileged investments, such as Individual Savings Accounts or Friendly Society policies, the projections are slightly higher at 5%, 7% and 9%.
Despite a review of the rates of projection used and increasing pressure from the industry, the FSA stated that they would not be changing them for investment products. However, due to the state of the markets and the general trend for insurance companies to move out of equity investments and into safer bond investments, the FSA is taking action.
Our View
The FSA wants the rates of projection used to better reflect the expected returns and intends to keep the situation under review. Whilst this is fine, there is a huge problem with projections which has escalated and come to a head through endowment progress letters.
People with endowments receive an annual notice from their provider company that says whether or not the policy is on target to produce enough money to repay the mortgage. The only problem is that providers base their 'okay to repay' judgement on the policy receiving 6% returns after charges every year. But, people are not receiving this amount and policyholders could have a false sense of security.
Whilst providers always state that the illustrated projection rates are not minimum or maximum amounts, the reality of what this means is not explained to policyholders.
We believe that the problem needs to be addressed and more information should be included in projection letters and statements. This will enable consumers to better understand their policy and the risks associated with returns. Always take advice.