A few years ago, if you’d asked to move your pension from a Defined Benefit Final Salary Pension Scheme, you’d have been told you were mad. Not only that, most reputable IFAs would have run a mile too. But times have changed. The freedoms of 2015 have changed the landscape, and final salary pension transfers are at a record high.
So why are we seeing such sizeable offers at the moment?
The answer complex, but at it’s heart, it’s down to the assumptions the pension trustees are using now, compared to what they have been historically.
Three Variables Affect Transfer Values
The three variables contributing to increased transfer values are
- Investment returns
In order to calculate a final salary pension transfer, the pension trustees revalue the pension from date of you leaving, to date of your , using inflation assumptions.
Then, they capitalise the income, using interest rates assumptions.
Finally, they discount this back to the present day, usingreturn assumptions.
There are legally defined maximums and minimums placed on the trustees relating indexation assumptions. So, lower assumedreturns and annuity rates are driving the sizeable pension values. But any increase in these assumptions could start to see transfer values fall again.
Low yields on gilts, the term used for a type of debt issued by the UK government, have exacerbated the issue. The low value of yields means that the amount of money needed to be set aside to pay for future, is extremely high. UK defined benefit pension funds traditionally invest heavily in gilts. As demand for gilts soared among nervous investors after the Brexit referendum, the value of gilts has been pushed down, so yields are low.
However, rising yields slash liabilities, and also cuts this amount, meaning that schemes may be about to reduce the amount they offer to people who want to transfer.
High Profile Firms Collapse
At the same time, high-profile cases such as the collapse of BHS have highlighted the exposure of final salary members to the finances of the firms that stand behind the schemes.
If firms do collapse, schemes fall into theProtection Fund, (PPF) where incomes are capped at 90pc for people not yet retired. That means you could face a far lower retirement income that you were expecting if the PPF has to step in to rescue your final salary pension scheme.
The final salary pension scheme has long been regarded as the gold-plated route to a comfortable retirement.
Since the Brexit vote, some financial advisers and their clients are thinking the previously unthinkable. Brexit-related market turbulence is bad news for pension savers nearing retirement who are seeking a secure income. At the same time, members of traditional company retirement schemes are experiencing what some advisors are calling a “Brexit bonus”. The offers made to some savers to cash in their defined benefit pension, have reached new highs since the June referendum.
This side-effect of Brexit-related market volatility has led some transfer valuations to increase by tens of thousands of pounds in months. In some cases, cash sums equivalent to more than 30 times the projected annual income on retirement have been offered to pension scheme members.
Fear of the liability
In light of all these issues, along with rising longevity of employees, pension scheme providers are increasingly keen to shift the long-term liability of final salary pension payments off their balance sheets.
Today’s high final salary pension transfers are essentially a carrot, designed to entice members to transfer out of their pension scheme and reduce their risk.
What should you do?
With current pension transfer values so high, it can be very tempting to transfer your defined benefit pension. But if your pension fund has recently sent you a sizeable cash equivalent transfer offer through the post, is it worth cashing in your final salary pension for the lump sum?
This will depend on your personal circumstances, but there are positives and negatives to final salary pension transfers. The only way, is to talk to a professionally qualified advisor, who can make sure you get the best deal for you, and that you don’t miss out on a potentially life changing opportunity.
The best advice is to seek advice. Why not talk to us at Haven for simple straightforward advice. We can help you make the right decision for you, before you make a decision you will regret!