The overwhelming majority of people who have been fortunate enough to be a member of a defined benefit (also known as ‘final salary’) occupational pension scheme should stay with it. After all, there is not much wrong with a guaranteed, inflation-linked income, which you cannot outlive.
However, wealthier clients may be more concerned about inheritance tax and the amount of income tax they pay rather than the prospect of running out of money. For such people the higher transfer values currently available will be good news. There are three factors that are driving up transfer values but the first – falling interest rates from UK government bonds (gilts) – is having the greatest impact.
Falling gilt yields – The economic uncertainty produced by the vote to leave the EU has seen investors moving into safe havens; gilts have been a major beneficiary of this trend. The increased demand has pushed prices high and as a result reduced gilt yields to historic lows. With the lower expected future returns from gilts, pension schemes have had to assume higher current values to provide the guaranteed future benefits – which in turn have resulted in higher pension transfer values. With Brexit expected to be no earlier than March 2019, these conditions are likely to continue for some time.
Lower expected investment returns – We currently live in an economy with low inflation and low interest rates. This doesn’t just drive up pension transfer values. In addition, defined benefit (final salary based pension schemes) are paying out more of their funds in retirement benefits to pensioners. So they are expected to take less investment risk by reducing the proportion of their funds in equities and switching to gilts and fixed interest stocks.
Improved life expectancy – Life expectancy at older ages in England for example has risen to its highest ever level. This is a generally welcome development, but it can be a headache for pension schemes that must now expect to pay pensions for longer and this is again reflected in higher transfer values.
It does not follow that higher transfer values mean that more people should transfer. After all, what most people want is a guaranteed and increasing income for life when they are faced with living longer and getting lower investment returns. But for those with enough wealth to be really confident about their own future financial security, the present transfer values could be worth considering.
Occupational pension schemes are regulated by The Pensions Regulator. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.