The fall in interest rates is boosting some pension transfer values.
Pension scheme deficits have been hitting the headlines again, and not just those of BHS. The Bank of England’s efforts to bolster the post-referendum economy have been to blame. On one widely quoted measure – the Pension Protection Fund’s PPF7800 Index – the overall deficit for private sector benefit schemes covered by the PPF was £408 billion in July 2016, an increase of over £170 billion in the space of just 12 months.
The reason is the fall in long term interest rates on Government gilts, which are the basis for valuing final salary pension scheme liabilities: as rates fall, the value put on the liabilities rises. Unfortunately for many schemes, the other side of the balance sheet – the investments assets – do not rise in value as rapidly.
There is one piece of potentially good news that stems from this situation: many schemes are increasing the transfer values they offer. This is due to increases in asset values and to schemes’ desire to reduce their liabilities by cutting membership. In some cases, transfer values have been more than 30 times the annual pension, meaning a £3,500 future pension could provide a six figure transfer value.
Final salary pension offer secure, guaranteed, inflation-proofed income for like, so their benefits should not be underestimated. However, there are circumstances in which alternative arrangements can provide a better outcome. If you have final salary benefits from previous employment, it could be worth seeing whether a transfer now makes sense, even if it did not a couple of years ago. To begin the process, please contact us.
The purpose of this blog is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.