Pension transfer values had fallen by 23% as of June 2022, with some of the most dramatic drops in recent years occurring after record-high values in 2021. Rising interest rates appear to be the primary culprit, but there are other factors at play too. While many factors influence Defined Benefit pension transfer values, the rising interest rate is the primary driver of the 2022 drop in transfer values.
The ultra-low interest rates that have fuelled soaring UK transfer values in recent years have now ended. After remaining at 0.1% for much of 2021, the Bank of England has raised interest rates several times. After 5 consecutive rate hikes, it is now at 1.25%, up from 0.1%, and there is talk of more rate hikes to combat rampant inflation. Rising interest rates, combined with other global and domestic market pressures, have impacted transfer values, resulting in massive drops across the board.
Watch a brief discussion and expert tips on what you should do when the CETV value dropping, the importance of an IFA, should you stay in your Final Salary pension or not, and how does that influence your pension transfer suitability in one of our YouTube video below.
Why Are CETVs Declining?
The CETVs reached new highs in December 2021, but extreme inflationary pressures and global stock market volatility, combined with rapid interest rate rises caused CETVs to plummet to new lows in 2022. Pension trustees oversee pension funds and guarantee members’ lifetime pension income (adjusted for inflation). Inflation in the United Kingdom is at a 40-year high and is expected to rise further, increasing the cost of providing pensions.
In 2022, transfer values have dropped precipitously. CETV values have fallen from record highs in December 2021 to record lows in 2022. Transfer values had fallen by 23% as of June 2022.
The estimated cash transfer value of a 64-year-old member with a pension of £10,000 per year in June 2022, according to the XPS pension transfer value index, was £200,405 down from £258,926 on January 1, 2022. The falling transfer values appear to be affecting people across the board, and with more interest rate hikes on the horizon, there’s no indication that the falling values will level off anytime soon.
Two key factors influencing pension transfer values are:
- The scheme’s ‘generosity’ – if schemes are de-risking their investments, they are more likely to offer a higher value.
- Members’ longevity predictions – the longer its members live, the more expensive the scheme is to run, and transfer values are more generous.
The long-term impact on life expectancy due to the Covid-19 pandemic and related health crises could also play a role in lowering transfer values, though this is expected to reverse in the UK in the coming years.
Other factors that can have an impact on pension transfer values, both positively and negatively, include: Rates of interest, Inflation rates, Stock market activity, bond yields, the age of the member in relation to the scheme’s retirement age, and the scheme’s funding position.
While transfer values should provide a fair representation of value, the first priority of pension trustees is to ensure the health of the pension scheme for its active members. As scheme costs rise, it stands to reason they would try to discourage people from leaving by offering lower CETVs.
Generally, the advice is to avoid leaving your retirement plan and stay put if your retirement is still a long way off. It is not generally advisable to consider a transfer if you are under the age of 50 because the risks and costs involved can be prohibitive. Of course, age isn’t the only factor influencing transfer values, so having a higher transfer value isn’t a given. A qualified pension transfer specialist can provide advice tailored to your specific needs. Pension transfers are not a one-size-fits-all proposition.
Cameron James, Expat Financial Planning – Your Trustworthy Pension Transfer Specialist.
Cameron James is an Appointed Representative of Blacktower Financial Management Limited and a member of Nexus Global (IFA Network) which is a trading name of Blacktower Financial Management Limited who are authorized and regulated in the UK by the Financial Conduct Authority. Blacktower Financial Management Limited’s FCA reference number is 188611. Cameron James Limited’s FCA reference number is 945566. 🇬🇧
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