Episode 27: Moving Abroad - the process, the challenges, the joys with Tom Pewtress, Peter Gollogly, Bryan Bann & Jonathan Lumb
Some key financial figures have been going up recently and pulling things northwards with them. Inflation has risen quickly and increased the cost of our bills and weekly shop. In response, many central banks have put up interest rates at record pace. The hike by the Bank of England to 1.75% was the sixth time since December they’d increased rates. This has been sending bond yields higher too.
You might wonder what all of this has got to do pension transfer values, but it has a big impact. In this article we’ll look at how this all affects the transfer value you could be offered for your final salary pension.
We know interest rates and bond yields (a bond’s rate of return) aren’t exactly the most exciting topics. They’re nevertheless very important if you’re thinking about transferring your final-salary pension, otherwise known as a ‘defined benefit’ or DB pension. That’s because interest rates affect bond yields, and bond yields affect how much money you’ll receive if you decide to transfer.
Without getting too technical, if interest rates rise bond yields tend to go up too. Yields on gilts (UK government bonds) are the ones to pay particular attention to if you have a UK final-salary pension. The current 10-year gilt yield, for example, is now 2.1% (correct as of 12 August 2022). Although that’s down from a high of 2.6% in June, that’s up from a low of 0.1% in August 2021, so there’s been a significant increase over the past year.
While rising gilt yields are generally good news for DB pension schemes, it’s not so great for those scheme members thinking about transferring their pension away.
If you request a transfer value from your pension scheme, actuaries must calculate a fair transfer value, which you could exchange for promised income in retirement. The actuaries consider many things such as your time to retirement, mortality assumptions, the rate of inflation, and gilt yields.
UK pension schemes invest heavily in gilts to produce low-risk income for members receiving pension payments. This means gilt yields drive much of the schemes’ return. The higher the yield, the higher the return, and the lower the sum needed to pay members’ income. This in turn lowers pension transfer values. The opposite is also true, so when yields fall transfer values tend to go up.
Back in July 2021, a 64-year-old with a pension providing income of £10,000 per year would have had a transfer value of approximately £248,000. Fast forward twelve months and the transfer value has decreased to circa £203,000.
In case you feel like you’ve missed the pension transfer boat, interest rates and bond yields won’t keep going up forever. While it could potentially be a long time until we reach the rock-bottom bond yields of recent years – if we ever do at all – we can’t rule out yields falling again.
The future direction of interest rates, bond yields and pension transfer values are very difficult to predict. Gilt yields don’t always follow interest rates as we’ve seen recently – interest rates have gone up since June but gilt yields have actually come down. There’s also no guarantee any of them will reach a certain level, so those waiting for yields to fall to ‘x’ or transfer values to reach ‘y’ could end up waiting a very long time.
It’s important to consider whether your pension scheme is currently offering a fair transfer value. You’ll also need to think about flexibility, investment growth, tax, death benefits, and currency options among other things. Even though bond yields are higher than before, a pension transfer could still be an attractive option depending on your circumstances and objectives, but of course you’ll need professional advice to help you make your decision. Speak to your Skybound Wealth advisor or contact our pension specialists if you’re thinking about transferring your final salary pension.
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