This is a question I get asked by many clients that what affects affects benefit transfer Values
Should I transfer now or wait for the value to go up in the future?
The short answer is that we don’t know. What we do know is that there are many factors that affect a defined benefit scheme transfer value and most of these are individual to the scheme itself.
Schemes generally don’t publish how they calculate their transfer values as these are specific to how the scheme is run. We can’t therefore calculate any schemes transfer value given the lack of workable data.
We can however use some parameters that many schemes use to gain an insight into why the values can change rapidly from month to month and year to year. We can’t just expect them to go up over time or relate them to defined contribution schemes which are linked to general investment market performance.
A defined benefit scheme is an agreement to pay a set level of income in the future which is generally inflation proofed (meaning the value of the benefits go up over time to compensate for the rising cost of goods and services).
In short, the scheme takes contributions from member and the company to invest and hopefully have enough to pay all the member in the scheme when they reach retirement and for the rest of theirs and their spouses/partners lives.
The risk is therefore borne by the scheme and not by the member, as is the case with a defined contribution scheme.
As a result of pension freedoms, many members are now wanting more flexibility from their defined benefit pensions and are requesting swapping the guaranteed income of a defined benefit scheme for a lump sum.
Over the last few years we have seen a sharp increase in those requesting a transfer value and indeed an increase in the transfer value itself, when compared to previous years.
One of the main factors which affects most transfer values is the longer term gilt rates. A gilt is issued by government and is essentially a loan which is purchased in promise to pay a certain level of income for a certain period of time.
Gilts have been issued by the government in hope of raising funds to pay for the additional costs of running the country. These gilts have been swallowed up, mainly by central banks which has intern forced the gilt yields lower.
What has all this got to do with defined benefit transfer values you may ask?
Well, the lower the gilt yield, generally, the higher the Cash Equivalent Transfer Value (CETV).
As a yield goes lower, a pension scheme has to make available a larger amount of money to get the same rate. Therefore, more money is offered to achieve a similar return as to when the yields were higher.
In simple terms, if it cost £100 to get 1% yield and the yield then reduced to 0.5%, it would then cost £200 to get the same return.
If we look back at the 15 year gilt rate we can see how volatile this has been and why transfer values may have had a rapid rise, particularly during the pandemic.
This is a basic example and as mentioned previously, this is one of many factors used to calculate the CETV.
Other factors that can affect the CETV are scheme specific. How well is the scheme funded? How many members are there? Is the scheme closed to new members? What is the performance of the underlying Fund?
The decision as whether to wait for a potential higher CETV in the future will come down to individual circumstances.
Do you need access to the funds?
Generally, if you don’t need access to a lump sum or income from your pension, it’s often advisable able to wait until you do. If you make a decision to move your scheme now, with the hope of having flexibility in 3 years’ time, the markets may have turned against you meaning the benefits you through you had are now reduced.
I think I can invest better than my scheme and provide a better income that they are offering.
This may be the case if markets perform, but remember, the risk will be borne 100% on you. Whilst your pension is with the scheme, they will bare 100% of the risk and if markets don’t perform, you’ll still get the same promised income. It will be your scheme who lose out.
Transferring your pension may be suitable in some circumstances such as:
Wanting to retain the assets for your family on death.
Having access to a larger amount of income earlier in retirement to meet expected costs which your DB scheme income won’t cover.
If the DB scheme is surplus to your requirements because of other pension income/assets.
Poor health meaning you might not expect to live long enough to extract the benefits.
Being single with no dependents.
There is no fixed reason as to whether a transfer is suitable, it’s all to do with individual circumstances. If you want to explore a possible transfer, give me a call or drop me an enquiry, I’ll be happy to have a no obligation initial chat.
Read about What is Abridged Advice