As financial advisers, we often come across clients who have Final Salary pensions and are considering transferring them. These types of pensions, also known as defined benefit pensions, provide a guaranteed income for the rest of the member's life.
However, due to changes in the economic and legislative environment, transferring out of a Final Salary pension has become a more attractive option for many people. In 2021, we had clients who were considering transferring their pensions, but ultimately decided not to. In hindsight, we regret not pushing our clients harder to complete their transfer in 2021 as the interest rate has raised tremendously in 2022.
Final Salary pension transfers can be a complex and confusing topic for many people, and one of the most important considerations when deciding whether or not to transfer is timing.
The interest rate environment plays a big role in determining the value of your CETV (Cash Equivalent Transfer Value). It is important to have a clear understanding of how the interest rate environment can affect your CETV and to make an informed decision based on your individual circumstances. Before we discuss further, our CEO and IFA explain the matter with you through the video below.
Why We Regret Not Pushing Our Clients To Review Their Final Salary Pension Transfer in 2021
One of the main reasons we regret not pushing our clients harder to complete their transfer in 2021 is the interest rate. When a client transfers their Final Salary pension, the pension scheme will provide a Cash Equivalent Transfer Value (CETV) that the client can use to transfer their Final Salary pension.
The CETV is based on the client's age, pensionable salary, and the scheme's interest rate assumption. In 2021, the interest rate assumption was low, and as a result, the CETV was also low. However, in 2022, the interest rate assumption has increased, and as a result, the CETV has also increased. This means that if our clients had transferred their pensions in 2021, they would have received a lower CETV than if they had transferred in 2022.
The Sweet Spot in 2020 and 2021
In 2020 and 2021, the financial crisis and global pandemic led to artificially low interest rates. This affected the CETV value as there is an inverse relationship between interest rates and CETVs. With the 10-year and 20-year gilt rate sitting between the two, this creates the difference in your CETV value. This period of time was considered a sweet spot for many individuals considering a Final Salary pension transfer as the CETV value was more favorable.
The Missed Opportunity of 2021
However, many individuals who did not act in 2021 may have missed out on this favorable CETV value. The aggressive rising of interest rates in 2022 could have been predicted by watching the actions of the Fed and Bank of England.
The Fed, despite not having direct influence on CETV values in the UK, has a major impact on monetary policy. The UK and EU often follow the Fed's actions, and this can have a significant impact on interest rates.
For those who did not act in 2021, they may now be in a less favorable position with a lower CETV value. This highlights the importance of timing when it comes to Final Salary pension transfers and the importance of being aware of the interest rate environment.
The Role of an IFA
Financial advisors play a crucial role in guiding clients in making informed decisions about their pension transfers. They can provide clients with a clear understanding of the current interest rate environment and the potential impact on their CETV value. However, it is also important for financial advisors to strike a balance between being aggressive and letting clients make their own decisions.
While it may be tempting for financial advisors to push clients to complete a pension transfer in a favorable interest rate environment, it is important to remember that a pension transfer may not be suitable for all individuals.
It is important for financial advisors to provide clients with all the information they need to make an informed decision, but ultimately it is up to the client to decide what is best for them.
Important Things to Consider
In conclusion, timing is an important consideration when it comes to Final Salary pension transfers. The interest rate environment plays a big role in determining the value of your CETV, and there was a sweet spot in 2020 and 2021 when CETV values were more favorable.
However, many individuals who did not act in 2021 may have missed out on this favorable CETV value due to the aggressive rising of interest rates in 2022.
It is important for individuals to seek the advice of a financial advisor who can guide them in making an informed decision about their pension transfer. However, it is also important for financial advisors to strike a balance between being aggressive and letting clients make their own decisions.
The suitability of a pension transfer should not be based solely on CETV value, and it is important for individuals to consider their individual circumstances before making a decision.
Why It Is Important to Consult an IFA
When considering transferring a Final Salary pension, it is essential to consult an Independent Financial Advisor (IFA). An IFA can provide you with the necessary financial advice and guidance to make an informed decision.
They can also assist you with the forms and paperwork required to complete the transfer process. Additionally, an IFA can help you understand the potential benefits and drawbacks of transferring your pension and help you weigh the pros and cons of transferring against staying in your current pension scheme.
We strongly recommend that anyone considering transferring their Final Salary pension consults an IFA for financial advice. If you would like to schedule a free consultation with us, claim your free consultation at the right side.