Q&A: Understanding projection rates

When insurance companies project the future value of investments they have to use annual growth rates set down by the regulator, the Financial Services Authority.

What are the FSA's rates?

For investments which are mainly linked to the stock market, the projection rates are 4%, 6% and 8%.

Those rates cover endowments, unit trusts and investments that are not tax-exempt.

Projections for pensions, equity ISAs and other tax-exempt investments are 1% higher - 5%, 7% and 9% - to take account of the tax relief.

Are individual companies allowed to reduce their rates?

Yes. The rules set out two circumstances in which projection rates can be reduced - though not increased - from these levels.

The FSA handbook states:

"Reduced rates of return must be used if the firm expects the rates in the tables to overstate the investment potential of a contract." [FSA Handbook 6.6.49 (2)]

This clause is the one used by Scottish Widows to reduce the rates of growth for mortgage endowments to 4%, 5% and 6%.

"Reduced rates of return may be used if requested by a customer" [FSA Handbook 6.6.49 (3)]

So if a customer writes requesting a projection at a lower rate which they specify, then the company can supply it.