Why are values so high?
In our last article, we discussed the hot topic of transfers out of defined benefit pensions – sometimes known as final salary schemes – and we’re going to continue with that theme this month. One particular point which is generating interest in pension transfers is the all-time high transfer values that are often available at the moment, and which can make it seem like an attractive option, so we’ll start by looking at why that is the case.
A transfer value is the sum of money that the scheme will offer you in return for giving up the final salary pension benefits you have accrued. The transfer value calculation is complicated, but the aim is to determine the current lump sum that would be required to provide the future stream of income and any tax-free lump sum you are entitled to in retirement if you were to remain in the scheme (this includes inflationary increases and a surviving spouse’s pension)
The transfer value calculation is affected by a number of factors, including interest rates, gilt yields, expected inflation, the funding position of the scheme and the ability of the sponsoring employer to make up any shortfalls, among other calculations. We are in an environment of historically low interest rates, massive injections of money into the economy through Bank of England quantitative easing and a lack of predicted inflation and wage growth. The outcome being that Gilt prices have increased significantly, having the effect of reducing Gilt yields to exceptionally low levels for a sustained period of time. When the reduced Gilt yields, amongst other factors, are taken in to account in the transfer value calculation, the effect is to increase the lump sum transfer value that would be required to provide your final salary pension benefits.
Will this continue – should I get out now?
That’s a tough question, which is why our last article was about the importance of highly personalised quality advice! The attitude of the central banks here, in Europe and the US might make it unlikely that transfer valuations will go much higher, unless something unforeseen happens. Nobody knows for sure which direction they will go, though – there are just too many unknowns.
So, it could be argued that now is a good time to transfer, but the risks of doing so are very significant. A high transfer valuation in isolation does not demonstrate that a transfer from the certainty provided by a final salary scheme would be suitable, as the future investment risk, inflation risk and longevity risk fall on you. The fundamental questions which need to be addressed, include:
- Can you achieve your retirement objectives if you transfer?
- Would you be better off staying in the final salary scheme?
- How do you feel about investment risk for your pension funds?
- Financially, could you tolerate a fall in the value of your pension?
Getting these decisions wrong could have real consequences to your future prosperity. Good advice will place emphasis on the risks associated with the new investment as well as considering the transfer value: if it’s all about the value, then beware.
So what should I do first?
As we’ve said in our first two articles: seek highly personalised quality and properly qualified advice from an advisor that YOU choose. Nearly 2 million people have been approached with unsolicited pensions or investment advice, often free of charge, in just one three-month period. Age UK reported that nearly five million people have been targeted by scammers, with older people as the most popular target. Research by the Money Advice Service backs up Age UK’s findings and showed there could be as many as eight scam calls every second – the equivalent of 250 million calls per year! A deal that offers much for little, or any investment that promises high returns for low risk should be looked at with suspicion.
So: find an advisor who is a specialist in pensions, whose qualifications are from a respected body (check them out – don’t accept what you are told at face value), and preferably one with Chartered status. Check with the regulator that they are legitimate if you have any doubts at all – scammers rely on people being too good mannered to seek confirmation of what they are told.
