Record High Transfer Values
The average transfer value of a final salary pension increased by over 30 per cent in the second quarter of 2020. This sharp increase during lockdown reflected ultra-low interest rates as investors flocked to safe haven investments such as UK long-dated gilts, which are used to calculate the value of pension payouts.
The lower interest rates, UK Gilt Yields and annuity rates the more money your previous employer needs to ‘ear mark’ for you within the scheme to secure your future income for life. This is reflected in your cash equivalent transfer value (CETV).
UK Gilt yields have been on a steady decline since the banking crisis of 2008 and more recently accelerated by COVID. This caused yields to fall to historic lows, meaning a surge in transfer values.
U.K. 15 Year Gilt Chart
In the current low interest rate environment transfer values are at all-time highs meaning a large portion of the risk associated with transferring is taken away. The growth needed to provide equivalent benefits including fees and inflation will be reasonable. This could mean more money for you plus the potential to leave anything left over to future generations.
Rising Deficits
Low interest rates may be good for transfer values but they are the opposite for scheme deficits. Downward pressure on Government bond yields is bad news for final salary pension schemes as this pushes up the value of its liabilities.
The combined deficit of UK pension schemes increased by almost £26 billion last month, from £140.5 billion at the end of August to £166.1 billion at the end of September. Over the past 12 months aggregate deficits have risen by almost £50 billion.
With the Government reducing the amount of financial support available to businesses, it is inevitable some will go bust. This will present a challenge for the Pension Protection Fund (PPF) which is responsible for paying a portion of the pensions owed to members of failed companies.
The PPF, referred to as a ‘Lifeboat’ is not backed by the government, it’s an insurance policy funded by all UK final salary pension schemes. Lifeboats can also sink, and the PPF warns it will likely need to take on more final salary pension schemes from failed companies due to COVID-19
Legislation Changes
Thanks to the UK governments flexi-access drawdown legislation that came into play in 2015 there are no limits on how much or how little you can take from the other main type of pension scheme. Money purchase schemes which are also known defined contribution (DC) is where your money would go if you chose to take your transfer offer, usually in the form of a UK Self Invested Personal Pension (SIPP). DC pensions are the more modern style of schemes where companies have no deficit or funding woes. They also include QROPS and stakeholder schemes.
Be aware that even though its legislation, some providers don’t allow this flexi-access out of their standard scheme. Most will insist you make a switch to a self-invested pension or some sort of drawdown fund.
Pension Freedom
Having 100% access to personal pensions from age 55 paved the way for ‘pension freedom.’ This phrase refers to fully withdrawing your pension monies from a money purchase scheme. Generally, this is done when a person lives in a country where there is no income tax and the UK has a tax treaty that passes taxing rights to that country e.g., UAE, Qatar, Saudi and. Malaysia.
Suitability
There are many factors to assess when trying to determine whether your scheme is suitable for your retirement needs. Here are just a few: ·
- Would you like to retire before your normal retirement date?·
- Would you prefer to have flexibility and control of over your income?·
- Is GBP the best currency for you?·
- Has the UK got a favorable tax treaty with your country of residence?·
- Would you prefer for your pension to be part of your legacy?·
- Does your risk profile mean you are not in favor of a guaranteed income?·
- Is your scheme in worrying amounts of deficit?
Summary
The bottom line is that with most pension schemes, it chose you, you didn’t choose it. It may be the most perfect scheme in the world for you, but there’s a high it may not. And there’s no negative to exploring your options.
Most final salary pension schemes will allow a minimum of 1 free transfer value a year at no cost. You should make a habit of requesting it either via an intermediary or yourself each year and reviewing your benefits against your expected needs.
Moving out of a final salary pension scheme and therefore giving up the guarantees is a decision that should be given some careful thought. To achieve the right outcome, we highly recommend taking advice from any regulated firm with an in-house pension transfer specialist.
Expert Wealth Adviser works closely with a small number of regulated and experienced advisory firms across the globe whom we feel are offering the most comprehensive and unbiased pension reviews. Feel free to reach out for an exploratory call.
