Why are Final Salary Pension Transfer Values So High?
igures from the Pension Regulator estimate that the number of people who have transferred out of their defined benefit (DB) pension schemes from 1 April 2017 and 31 March 2018 stands at 100,000 with pension values totalling £14.3bn. One of the reasons so many people are choosing to transfer out of their Final Salary Pension Schemes is the huge rise in their transfer values over the last few years, but why are final salary pension transfer values so high?
Over £14.3bn worth of Defined Benefit pensions were transferred from 1 April 2017 and 31 March 2018
Calculating Final Salary Pension Transfer Values
To understand why final salary pension transfer values are so high you need to understand how they are calculated.
Factors such as Your Age, Scheme Retirement Age, Cost of Living, Life Expectancy and whether you are married or single, all come into play when calculating your pension transfer value but the main driver is the value of Gilt Yields.
Many Final Salary Schemes have switched to low-risk Gilt Bond investments to ensure that they can pay their member’s pensions. Pension Schemes “discount” transfer offers by the return they expect to make on their investments: the lower the return, the higher the sum needed to pay the pension and hence the higher the transfer value.
What is a Gilt?
Gilts are British Government Bonds issued by HM Treasury. It’s how the UK government fund their borrowing. They pay a fixed amount of interest over a set period of time and you are guaranteed to get the face value back at the end of the time period.
However, the “face value” of the bond doesn’t necessarily reflect how much it is worth. That’s because they can be traded on the open market after they are purchased, which means their price can go down as well as up.
The yield is the interest rate on a gilt based on its buying price, rather than its ‘face value’ so when the value of the Gilts goes up, the yield goes down.
Gilt values tend to be high when interest rates are low (or likely to be lowered) because the rate of interest they pay will often beat anything you would get in a savings account and will, therefore, be in high demand, similarly, the opposite is true – if interest rates rise Gilt values can drop.
Gilt Yields underpin both the overall “funding position” of a final salary scheme – the ratio of assets to liabilities – and the transfer values it offers to members.
As interest rates continue to remain at historic lows it seems that final salary pension transfer values are likely to remain high.
What else affects Final Salary Pension transfer values?
Things like Your Age, Scheme Retirement Age, Cost of Living, Life Expectancy and whether you are married or single all have an impact on your transfer value but it is also worth noting that Pension Scheme trustees have the right to adjust Transfer Values so they represent “fair value” and do not adversely affect other members. If the schemes funding position changes, or lots of people transfer out in a short space of time, values can fall.
Beware high transfer values
It is important to remember that just because final salary pension transfer values are relatively high at the moment, that still does not mean that transferring your pension is necessarily a good idea for you.
Final Salary Pension Transfer
If you’re considering a Final Salary Pension Transfer it is always worth seeking financial advice from a qualified Pension Transfer Specialist. If you don’t know where to start our Definitive Guide to Final Salary Pension Transfer should point you in the right direction