Why Did My Pension Shrink?

updated: January 22, 2010

This section contains important information for all those who have one or more ‘money purchase’ pension plans. This includes all forms of private pension plan such as a personal pension, stakeholder pension and retirement annuity contract, as well as many types of group pension and money purchase pension schemes provided by employers.

It concerns the fact that, with effect from 1st April 2003, the illustration of your projected pension benefits from these types of plan are affected by the innocuous sounding Statutory Money Purchase Illustrations (SMPIs) rules.

These SMPIs, at a stroke, halve the amount of projected pension that you might have been expecting based on pensions statements produced for your plan(s) prior to April 2003.

Put simply, Statutory Money Purchase Illustrations have to show the real value in today’s prices, of the income that you can expect to buy with your pension fund at retirement. This income is normally provided by the purchase of an annuity, which is a guaranteed income for the rest of your life. SMPI illustrations assume 2.5% inflation between now and retirement and a maximum return of 4.5% a year for equity (ie stocks and shares) linked funds and less for other types of investments. These restrictions make a big impact on an otherwise healthy looking pension fund. For example, if you have fifteen years to go to retirement it will reduce the pension figure you were previously shown by around a third.

However, there is more...

To obtain further information please click here for our pdf Guide to Why Did My Pension Shrink?.