The question is will this accelerate the Retirement Plan Death Spiral. Under the Retirement Plan Death Spiral, savers make up the shortfall in earnings on their retirement funds by saving more and deferring current consumption.
Naturally, the slowdown in current consumption reduce the return on the retirement fund assets and causes an even bigger shortfall to occur. The negative self-reinforcing cycle continues as the saver responds by once again reducing their current consumption and saving more.
Millions of savers will see the predicted value of their retirement pots plunge by almost 40 per cent after the financial regulator ordered pension firms to cut their growth forecasts due to the global economic slowdown.
The Financial Services Authority (FSA) said that from 2014 the predicted growth rates used to give investors an idea of what their pension pot will be worth when they retire must be significantly lower than they are today.
Currently pension companies use a so-called “intermediate projection rate” of 7 per cent in statements to savers. This means that someone in their 20s who earns £30,000 and saves £2,000 a year into a workplace pension can expect to have a retirement pot when they reach 68 of £540,000.
However under the new 5 per cent growth rate that firms will have to use, this pot will be valued at just £335,000. The change means that the person’s predicted pension income will fall from £10,400 a year to £6,430 a year, a drop of 38 per cent.
Experts said that the lower rate will provide a “dose of cold economic reality” to savers and will give them a more accurate idea of the money they can expect to receive on retirement. ...
Tom McPhail, head of pensions research at Hargreaves Lansdown, the pension company, said: “This is a dose of cold economic reality for investors; the FSA is telling them to expect lower growth, which means that for a given level of pension they need to save more and that means making more compromises over how much they can afford to spend today.”Please re-read the highlighted text as it summarizes the Retirement Plan Death Spiral. No growth in demand, leads to lower investment returns, leads to individuals having to save more, leads to lower demand....