During the peak of Covid-19, your CETV value increased, possibly reaching a record high. You may or you may not have noticed. Many factors influence your CETV value, a major one being the UK government lowering interest rates. This was done in an attempt to preserve the economy by encourageing people to spend money.
Fast-forward to today, the UK government has been constantly increasing interest rates, which eventually affects your CETV value.
How does this happen? What causes the UK government to increase interest rates from time to time? How do interest rates affect inflation?
Before answering these questions, watch our video where we discuss this from the perspective of a Pension Transfer Specialist. If you want straightforward explanations on pensions and retirement planning, visit our YouTube channel.
How Do Interest Rates Affect Inflation?
Currently, we are in a time where central banks such as the Federal Reserve and the Bank of England are raising interest rates. The central banks did this to try to curb the current inflation.
How does this work? As interest rates rise, the cost of borrowing also increases.
This means that people have less money and will buy less products and fewer goods. Hence, the pressure on those goods falls, resulting in inflation falling. In the opposite situation, you have the opposite effect.
The Current State of the Economy
At the moment, we have a statement from the chair of the FED, Jerome Powell, talking about interest rates. He expressed that the FED will continue to raise interest rates in an attempt to reduce inflation. Unfortunately, raising or decreasing interest rates is one of the biggest economic levers the government has. It is important to note that it typically takes around 12 months from when they start pulling that economic lever to see the impact on the inflation.
When they pull this economic lever, the stock and equity markets react instantly. For example, during Jerome Powell’s recent eight-minute speech about the FED’s plan to continue raising interest rates, investors wiped around 50 billion dollars from the asset values of billionaires like Jeff Bezos and Elon Musk. Over those eight minutes, people changed their perception of the financial markets. This is possible because we’re now living in a world where financial markets go up and down on a whim based on the information available.
How Do Interest Rates Affect CETV Values?
If you currently have a Final Salary pension scheme or you’re about to obtain your CETVs, you must be aware that since 2022 CETV values have been decreasing. We had clients at the start of the year who obtained their second or even third CETVs because they didn't take the plunge. Obviously, the value of their CETV dropped over that period of time because they didn’t take action. The reason for this is there is an inverse relationship between interest rates and CETV values. When the interest rates go up, your CETV values go down and vice versa.
Now, the thing that sits in between interest rates and CETV values is actually gilt rate schemes in the UK. Your DB scheme doesn't go and take the interest rate from the Bank of England or the FED. Normally, your ceding schemes will use the 10-year or the 20-year gilt rate in the UK. Several factors influence the gilt rate, including market information, interest rates, and the FED’s clear statement that they will continue to raise rates.
Considering the factors mentioned above, such as the increased interest rates that are coming in the near future, we don't see a direct impact straight away on your CETV value. What we can say is, over the course of 2022, 2023, and possibly 2024, we do not see things getting better and we do not see a situation where they're going to start to decrease the interest rates which would mean your CETV values would be going back up again
As such, for anyone who has a guaranteed CETV value right now, if you let that one expire and then get a new guaranteed CETV three months or six months from now, it's probably going to be lower than the amount you've been offered now.
What you need to know about your CETV values
One of the most important things to remember is your CETV value in itself does not affect the suitability of your pension transfer. Any good or qualified Pension Transfer Specialist should not advise you against transferring your Final Salary pension based only on your CETV values.
Before providing you with financial advice, your IFA should be doing a thorough analysis of your current situation. Is it suitable for you to move away from a safeguarded asset? What benefits would you gain from transferring out? What other assets do you have? Who relies on you? Are you married? Are you not married? Do you have dependents? There are many factors that are actually more important than your CETV values.
What you need to remember is, if you're looking to transfer out your Final Salary pension, don't wait around for your CETV to increase – it could be a huge waste of your time, and you won't be able to predict when your CETV value will rise. Instead, why not take the opportunity to invest your asset now and reap the benefits of your hard-earned savings? Waiting for your CETV to increase means that you could be missing out on potential profits, and you could be waiting months or even years for the value of your pension to increase.
Don’t wait for your CETV value to rise, it’s unpredictable and could cost you valuable time and potential gains. Instead, take control of your pension’s future today. Book a free initial consultation with one of our expert IFAs now to explore your options and get tailored advice on transferring your Final Salary pension. Secure your financial future with smart decisions guided by trusted professionals.
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