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The FCA published a consultation on the projection rates used by investment firms when showing customers what their money might be worth in the future, you can find the consultation.
The FCA has confirmed it still believes a five per cent long term growth rate is the best estimate for the nominal single rate of return over the next 10 to 15 years.
For investment products which don’t benefit from a tax exemption (eg arrangements other than pensions and ISAs), the FCA requires firms to use a projection rate 0.5 per cent lower.
Price inflation assumptions have been based on RPI and will now be based on CPI, resulting in a drop from 2.5 per cent to two per cent. Where contributions, benefits or charges are linked to RPI then this will be three per cent. Earnings inflation will be dropped from four per cent to 3.5 per cent.
The five per cent investment growth rate assumption is based on an investment portfolio comprising:
· 60% equity
· 20% gilts
· 10% corporate bonds
· 7% in property
· 3% in cash and money market returns
Alongside the five per cent projection rate, the upper and lower assumed rates of return stay at eight per cent and two per cent.
Tom McPhail, head of policy: ‘In spite of all the economic and political fluctuations and uncertainties we have experienced in recent years, the FCA is still comfortable with the view that an investor holding a typical mixed portfolio predominantly invested in equities, can expect to enjoy a real return of around 3 per cent a year. For any investor fearful of committing their savings to the investment markets, this is an important message: if you want to make your money grow over the long term, take advantage of the tax breaks on offer and invest in the stock market; holding your money in cash is fine for the short term but over time it is likely to be eroded by inflation.’