Pension transfer values fell last month due to a sharp rise in gilt yields, which could signal the end of record ‘golden goodbye’ payments from employers.
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For months, firms have offered huge golden goodbyes to retirement savers in a bid to urge them to leave their final salary pension schemes.
Many savers are offered 30 or 40 times the value of their pension funds as an incentive to move.
But changes in the market could mean the end of the massive payouts.
The window of opportunity for retirement savers thinking about a pension transfer on enhanced terms may soon slam shut.
What is a pension transfer value?
The technical term for a pension transfer value is a ‘cash equivalent transfer value’ or CETV.
In simple terms, the CETV is the cash valuation of a retirement saver’s lifetime pension benefits. For savers with more than one pension, each scheme has a CETV, so your net pension value is each scheme’s CETV added together.
Every pension provider drafts a CETV based on the same formulae to make working out pension values simpler.
According to CETV monitor XPS Pensions Group, in September 2021, the average CETV was £251,000 – down from a record high of £394,000 for men and £326,000 for women in the year to the end of March 2021.
So, a pension provider calculates a CETV based on the industry formula, then can enhance the amount by adding a multiple to make a golden goodbye.
Market changes impacting pension transfer values
XPS Pensions blames the increase in yields for government bonds for directly reducing CETVS.
The Bank of England has hinted that an interest rate rise is on the way to counter inflation. The Bank wants the cost of living to hover around the 2 per cent mark. In September 2021, the Consumer Price Index (CPI) was running at 3.1 per cent.
The higher the interest rate, the better the financial return for pension schemes, but the return needs to be high enough to grow the fund to cover current and future payments to the members.
Some critics blame pension schemes for investing too much in low yield assets like government bonds (gilts).
In 2019, nearly two-thirds (63 per cent) of pension scheme investments were in gilts, rising from 59 per cent in 2018 and 28 per cent in 2006.
Another problem is retirement savers are living longer. In 1980, life expectancy was 73 years old on average. In 2020, life expectancy had risen to 81 years old. If people live longer, pension schemes need more money to cover their benefits, but they can’t raise the cash they need if interest rates are too low.
There’s little chance interest rates can fall lower than the current 0.1 per cent, but where they go and when is uncertain.
So, are the days of record pension transfers over?
It’s hard to say, but the economic indicators seem to present an argument for the end of record CETVs.
For retirement savers considering a pension transfer, waiting may mean losing financially as the multiples offered by employers start to dwindle as gilt yields and interest rates swing up.
Pension trustees may put the brakes on higher payouts while waiting to see where the markets are going.
Pension analysts Lane, Clark and Peacock (LCP) point out another factor impacting the number of pension transfers is the contingent fees ban imposed by the consumer watchdog, the Financial Conduct Authority (FCA).
Contingent fees are payments from retirement savers to their advisers that rely on a free pension review. The adviser is paid if the saver goes ahead with the recommendation offered.
Number of pension transfers falling
The ban outlaws free workplace pension transfer advice. Instead, the review must be paid for, regardless of if the transfer proceeds. These fees start at around £3,000.
Bart Huby, Partner at LCP, said: “DB transfer activity has been in gradual decline for several years, but the ban on contingent charging seems to have reinforced this trend, effectively hollowing out the middle market.
“In contrast, there has been much less impact on the largest pots, where the advice cost is still relatively modest compared to the amount transferred. But for average transfer values, an upfront advice cost running into thousands of pounds, and for advice which may be not to transfer in any case, is increasingly acting as a deterrent to transfer activity.”
LCP data shows 15 per cent of pension reviews resulted in a transfer in the final three months of 2020, compared to 34 per cent in 2017.
Only 12 per cent of Q4 2020 CETVs quoted transfer values between £400,000 and £800,000, compared with 32 per cent in 2019 and a peak of 51 per cent in Q3 2017.
Over 55s are more likely to transfer
The data also shows that the older the retirement saver, the more likely they will seek a pension transfer.
Quotation rates are highest for savers over 55 years old, says LCP, compared to just 3 per cent of those under 50 years old.
Have Pension Transfer Values Hit A Peak FAQ
Most pension transfers involve moving from a workplace defined benefit scheme to a defined contribution pension.
The value of a DB pension is based on the length of service and salary on retirement. In contrast, the value of a DC pension relies on the investment value of the underlying fund.
Savers transfer their pensions for lots of reasons – the main ones include:
• Expats decide to move to an offshore Qualifying Recognised Overseas Pension Scheme (QROPS)
• A workplace scheme does not pay until age 60 or 65, but saver wants to retire early to take advantage of flexible access from the age of 55
• Lack of confidence employer will still be around when saver comes to retirement
• The high value of the golden goodbye CETV offer
Firstly, if you want to transfer your pension and the combined value of all your funds, even those with other employers, is more than £30,000.
Points to consider include:
• Checking to see if any early leaving fees are triggered if you switch pensions
• Ask your provider about the benefits you will lose, such as the cost of living increases, death benefits for a spouse, or guaranteed annuity rates. These are all lost on a transfer to a DC pension
• The age you want to retire – the earliest is your 55th birthday unless you are seriously ill
Yes, you can, but the move is not necessarily wise as much financial and administrative red tape is involved. Providers prefer to see the move overseen by an adviser.
According to XPS Pensions Group, around 46 per cent of pension transfer inquiries generate a scam red flag.
Check your new provider is not a scammer with the FCA before committing to a transfer and certainly before handing over any money.
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