If you are someone that is considering transferring your defined benefit pension to a personal defined contribution pension then you may be interested to know that recently, defined benefit transfer values hit record highs.
According to the XPS Transfer Value Index, the average defined benefit transfer value was £261,500 at the end of July 2020.
In this article we’ll explain what’s causing these record highs and why you should still be cautious. We’ll also confirm when it is right to at least review your defined benefit pension.
What is causing record defined benefit transfer values
Like most things right now, COVID is having an impact on defined benefit transfer values.
In order to compensate for the impact of COVID on global economies, governments and central banks have been pumping in huge amounts of money into their battered economies. This money comes from governments asking the markets for loans otherwise known as bonds. In order to keep interest (yield) rates low, it’s been mainly central banks that have been buying these bonds. The more they buy, the lower the interest rate goes.
This has a direct impact on defined benefit transfer values as transfer values are worked out using bond yields and for the UK, more specifically, gilt yields. Simply put, the lower the yields, the more money a pension scheme has to find to fund the ongoing pension income pay out and therefore offer as a transfer value.
So is now the best time ever to transfer a defined benefit pension?
Well of course it all depends on your unique circumstance.
For anyone considering this option you need to understand that you are moving from a certainty based retirement to a probability based retirement. By transferring your defined benefit pension you are giving up a potential guaranteed income for the rest of your life for a pension pot that you will need to manage and ensure lasts for the rest of your life.
Who might these record defined benefit transfer values appeal to?
Generally speaking, although certainly not in all cases, you might consider transferring or at least reviewing your private sector defined benefit pension if:
- You are married or in a civil partnership and have children.
- You already have guaranteed income (another defined benefit pension, annuity or State Pension) that covers all your essential spending in retirement.
- You require flexible income and/or a higher tax free pension lump sum (PCLS).
- You are comfortable with investment risk.
- You have a reduced life expectancy.
The financial services regulator, the Financial Conduct Authority (FCA) has made it compulsory for people to take financial advice if their defined benefit transfer values are above £30,000.
The problem is, it is becoming increasingly difficult for people to be able to get their defined benefit pensions reviewed as the number of Financial Advisers offering this type of advice has halved in the last 5 years.
The reason for this is because there are heavy penalties for Financial Advisers to pay if they get the advice wrong and professional indemnity insurers are charging huge premiums to cover this type of advice.
Even if you can find an adviser that will provide the advice, they may decide that the advice is to leave the pension where it is. You are of course entitled to not follow this advice and still transfer your defined benefit pension however you will struggle to find a pension company that accepts a defined benefit pension transfer without the adviser recommending the transfer. The pension companies don’t want the liability either and want to pass the buck back to the adviser.
Currently, we are able to help. We use a team that specialise in defined benefit pension reviews and even if the recommendation is to not transfer we know of at least one provider that will still accept a transfer so you can still have full control over your destiny.
If you would like to discuss your review options in a no–obligation, free, 15-minute call then please get in touch.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.