The spike in demand to cash in final salary or DB pension schemes has been one of the big trends to emerge since the pension freedoms were introduced in April 2015.
Defined benefit (DB) or final salary pension transfer values have hit a record high, following the dramatic decline in gilt yields in recent months.
Transfer values fluctuate in line with gilt yields, the measure used by the scheme's actuary to calculate how much it would cost a person to buy the same income as provided by the scheme if they had to purchase an annuity on the open market. Annuity rates are shaped largely by gilt rates.
Moreover, low bond yields increase the cost to pension schemes as they need larger funds to produce the same income for members, which is why they are keen to reduce their liabilities and get pension savers with financial salary pensions off their books.
Over the past three months the benchmark 10-year gilt yield has slumped from 0.87% to 0.39%. As a result, XPS Pensions Group's 'Transfer Value Index' rose to £258,200 on 21 August, up from £247,400 at the end of July. The index tracks the transfer value that would be provided by a typical DB scheme to a member aged 64 who is entitled to a pension of £10,000 each year, starting at age 65 and increasing each year in line with inflation.
Mark Barlow, partner at XPS Pensions Group, notes:
"The impacts of recent volatile markets have seen transfer values increase steadily over the last two months, with an all-time high in August. The continuing fall in gilt yields has pushed transfer values to new record highs, around 10% higher than they were this time last year. Although there is a lot of uncertainty around the future of the financial markets, an increase in transfer values will mean we are likely to see a lot of members investigating their options."
The spike in demand to cash in final salary or DB pension schemes has been one of the big trends to emerge since the pension freedoms were introduced in April 2015. As well as transferring values rising to high levels, another attraction is that under the pension freedoms it has become much easier to pass on an inheritance if the DB pension is transferred.
But for most people a transfer is probably not in their best interest. Final salary pensions have historically been based on a percentage of a worker's final salary multiplied by the number of years they have been in the scheme. However, more recently schemes have been modified to base payouts on a less generous ‘career average' salary.
In addition, most schemes are typically inflation-proofed and also offer a continuing spousal income, usually 50%, upon the death of the pension holder.
In June, however, the City watchdog - the Financial Conduct Authority (FCA) - found seven in 10 defined DB or final salary transfer requests are approved by financial advisers. It described this as "deeply concerning and disappointing". The average pension transfer figure stood at £352,303.
As a result, the FCA vowed to step up its crackdown on final salary pension transfers, building on work it carried out two years ago when rules were tightened.
In late July the FCA put forward proposals to ban financial advisers from getting paid only when a customer moves a pension pot – known in the jargon as 'contingent charging'.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.