Cash lump sums offered to individuals looking to give up generous final salary style pensions have jumped to record highs in August on the back of fears of a global recession.
Most active members of private sector “defined benefit” schemes can opt to take their future pension as a cash lump sum today, rather than an indexed income for life when they retire, and transfer to a “defined contribution” pension which gives savers more flexibility over how they can draw income.
Pension scheme administrators reported this week that transfer values being offered to members had hit a record high this month. Fears of a global economic downturn have seen investors flock to haven investments such as UK long-dated gilts which are used to calculate the value of pension payouts.
The average transfer value for a 55-year-old who had been expecting a £10,000 a year pension jumped to £258,000 this month, up from £247,000 a year ago, according to XPS Pension Group.
“The impact of recent volatile markets have seen transfer values increase steadily over the past two months, with an all-time high in August,” said Mark Barlow, partner at XPS.
The more investors are prepared to pay for government bonds, the lower yields will fall — and pension transfer values rise.
“The continuing fall in gilt yields has pushed transfer values to new record highs, around 10 per cent higher than they were this time last year,” Mr Barlow said.
“The recent sharp fall in long-dated gilt yields in 2019 is likely to mean that transfer values for typical members are currently at record high levels,” said Liam Mayne, partner, corporate consulting with Barnett Waddingham, the actuarial firm and scheme administrator,
“Different schemes offer different levels of transfer values to members — typically 15 times to 30 times the defined benefit pension being given up by the member, though it can be higher. This depends on scheme-specific factors like what increases the scheme provides in retirement, what investment strategy the scheme is running and how well funded it is.”
According to Royal London, the total value of defined benefit pension transfers has reached £60bn in the past three years. The Pensions Regulator has also disclosed that 390,000 people have used pension freedoms to access defined benefit pension pots during that period.
The trend comes as the City watchdog takes action to stem the flow of defined benefit scheme members accepting recommendations from advisers to transfer their pensions.
In July, the Financial Conduct Authority unveiled a package of measures to raise advice standards after becoming concerned that too many savers were acting against its advice that keeping a defined benefit pension, with its guaranteed income, was still likely to be the best financial outcome for most people.
“While market conditions can influence take up, the decision to transfer is more likely to be driven by personal circumstances and attitude to risk,” said Andrew Ward, partner at Mercer, the actuarial consultants.
“Members need to have a good understanding of all of the pros and cons and seek appropriate financial advice before exercising their right to transfer.”
Those looking to transfer defined benefit pension pots worth more than £30,000 must obtain financial advice from an independent pension specialist under UK law.